<p>An Enterprising Nation The final report of the Small Business Taskforce page 1 An Enterprising Nation The final report of the Small Business Taskforce This is the final report of the Small Business Taskforce, an independent study commissioned by Rt Hon. Ed Miliband MP, Leader of the Labour Party and Chuka Umunna MP, Shadow Secretary of State for Business, Innovation and Skills. The views expressed in this report are those of the members of the Taskforce and will be considered as submissions to Labour’s policy review. The report sets out a menu of proposals to address the problems facing small businesses. It recommends strategies to improve access to finance and to raise skills, to support innovation and to create easier routes to market. It outlines necessary reforms for how government operates to support these changes to increase growth and prosperity. There is a single objective behind all the proposals: to make Britain the best place it can be to start, run and grow a small business. ! Review Labour’s Policy Review page 2 Contents Dedication to Nigel Doughty ....................................................................................... 3 Foreword from Ed Miliband and Chuka Umunna ........................................................ 4 Foreword from Bill Thomas, Taskforce Chair ............................................................. 5 Executive Summary .................................................................................................... 6 1. Introduction ........................................................................................................... 12 Strategic context ................................................................................................. 13 The critical importance of small businesses ....................................................... 14 The need for a robust active industrial strategy ................................................. 15 The approach of the Taskforce .......................................................................... 17 Financial Impact ................................................................................................. 19 2. Finance: proximity, diversity, equity ...................................................................... 20 Bank lending ....................................................................................................... 21 Equity (from private sector investment funds) .................................................... 29 Personal investments (from founders & business angels) ................................. 32 Listing on public markets .................................................................................... 33 3. People and skills ................................................................................................... 35 Equipping entrepreneurs .................................................................................... 35 Employees: developing people and eliminating barriers to additional hiring ...... 39 4. Customers: Lead Customers, Government Procurement, Late Payment and Exports ...................................................................................................................... 43 Lead customers .................................................................................................. 43 Government procurement .................................................................................. 46 Late payment ...................................................................................................... 49 Exports ............................................................................................................... 50 5. An Effective Innovation System ............................................................................ 53 Innovation ........................................................................................................... 53 Levelling the digital playing field for small businesses ....................................... 57 Creating a world-leading digital infrastructure .................................................... 58 6. Organising Government to support Small Businesses ......................................... 60 Government ........................................................................................................ 60 Facilitate a more united voice for local business ................................................ 62 Regulation .......................................................................................................... 63 Tax, HMRC & Companies House: reducing compliance burdens ..................... 66 Managing insolvency .......................................................................................... 68 Concluding remarks .................................................................................................. 70 Appendices ............................................................................................................... 71 page 3 Dedication to Nigel Doughty Nigel Doughty, 1957-2012 This report is dedicated to the memory of Nigel Doughty. Nigel was a founding partner of Doughty Hanson, a past owner and Chairman of Nottingham Forest Football Club, founder of the Doughty Centre for Corporate Social Responsibility at Cranfield School of Management and President of the Cranfield Trust. Through the Doughty Family Foundation and the Doughty Hanson Charitable Foundation, he was one of the country's leading philanthropists. He was a life-long supporter of the Labour Party and Chaired the Party’s Small Business Taskforce until his untimely death last year. His emerging vision for small business in Britain is captured in the Taskforce's interim report published in December 2011. In this final report we have sought to build on his vision and to honour his legacy.   page 4 Foreword from Ed Miliband and Chuka Umunna Economic success is made by the many. That means that Britain’s small businesses are vital to the future success of our country. Small businesses are inventing, investing and working as hard as they ever have right now. But they are facing enormous obstacles, from banks that do not lend to a training system that doesn’t deliver the skilled workforce they need. All small businesses know that they can’t overcome these obstacles on their own. They need a country that works with them and a government with new ideas for the future. We are determined that One Nation Labour will become that government. That is why we commissioned an independent review into how Britain can support small businesses in the challenges ahead, to remove barriers and help foster innovation. And why we warmly welcome this report. We are extremely grateful to Bill Thomas, a former Senior Vice President of Hewlett Packard Europe and Chair of the Advisory board at Cranfield School of Management, for chairing the taskforce with great commitment and imagination. The report Bill and his team produced is fizzing with ideas to challenge and inform Labour’s policy review, to make a huge difference and to put small business at the heart of future growth and the economy we need. We also pay tribute to Nigel Doughty, who originally chaired the taskforce. Nigel was an outstanding businessman, who was deeply passionate about his country and its future. Nigel brought great experience, insight, energy and verve to this project at the outset. He sadly passed away in February 2012. The impact of the interim report Nigel and his team published in December 2011, is a testament to his memory. Labour has already taken forward many of the ideas in the interim report, including the case for a British Investment Bank, proposals for revamping the role of the Business Department and putting in place a more effective procurement policy. We look forward now to considering the recommendations in this final report as we develop our programme for the future of British business. The great spirit of Britain’s 4.8 million businesses has never been in doubt. This report, written by business people for business people, asks us to build on that spirit. The debate will rightly continue on the individual recommendations it makes. But what it shows us beyond doubt is that Britain’s businesses can only thrive if we work together as a country, with businesses and government each playing their part in overcoming the challenges we currently face. That is how we lay the foundations for our country’s future success. That is how we create an economy made to last. Rt. Hon. Ed Miliband MP and Chuka Umunna MP page 5 Foreword from Bill Thomas, Taskforce Chair Enabling a vibrant economy is a major priority for any government. It creates the funding for all public services; it creates opportunities for the next generation and ultimately enables a country to pay its way in the world. Small businesses represent 99% of UK businesses and within their ranks lie the seven per cent of high growth firms that create more than half of our new jobs. As such, small business lies at the very heart of economic growth. For this reason I was more than willing to take on the role of Chair of the Small Business Taskforce. Our remit was to consider a broad range of policies and interventions, and make recommendations to Labour’s policy review process, aimed at making Britain the best place it can be to launch and grow a small business. Our process has involved widespread consultation up and down the country and we have received great support from many organisations and individuals. In particular, we have been assisted by – and are grateful for extensive input from – the British Chamber of Commerce, the Institute of Directors, the Federation of Small Businesses, the Forum for Private Business, the Engineering Employers Federation, the Trades Union Congress and the Confederation of British Industries. International best practise has been considered with visits to Singapore, Germany and the United States. I have been extremely fortunate to have chaired a diverse team of hardworking, highly experienced, creative individuals. The Taskforce includes entrepreneurs, academics, private equity/venture capital specialists, local government officials and business people drawn from a broad cross-section of sectors. I am very grateful for their hard work, the team spirit they created and their commitment to the overall goal. In particular I would like to thank Jeff Masters and Matt Kelcher for their support in running the Taskforce secretariat and George Bevis for his dedicated marshalling and production of the final report. There is no magic bullet for enabling small business and consequently the scope of our investigations is broad. Progress is required on a number of fronts and this is reflected in the wide range of recommendations made. In each case, we have sought to identify the problems constraining small business, and the potential solutions. The ideas in this document are a starting point for further work. They present a menu of strategies, not a manifesto. We hope that the options set out will provide a basis for a wide- ranging consultation with stakeholders and small firms about the support they need to launch, survive and thrive. In doing so, I look forward to continuing to work with Toby Perkins MP, the Shadow Minister for Small Business, whose insightful input and constant support have been invaluable in completing the study. Making it easier to launch and grow a business in the UK has the potential to make maximum use of the innovative, entrepreneurial spirit that has always underpinned the best of British business. Much of the growth, new jobs and future strengths of the UK economy will originate from small businesses. When we focus on the future of small businesses we are focusing on the future of our nation’s prosperity. Bill Thomas Chair, Small Business Taskforce     page 6 Executive Summary This is the final report of the Small Business Taskforce, an independent study commissioned by Rt Hon. Ed Miliband MP, Leader of the Labour Party and Chuka Umunna MP, Shadow Secretary of State for Business, Innovation and Skills. The views expressed in this report are those of the members of the Taskforce and will be considered as submissions to Labour’s policy review. The report sets out a menu of proposals to address the problems facing small businesses. It recommends strategies to improve access to finance and to raise skills, to support innovation and to create easier routes to market. It outlines necessary reforms for how government operates to support these changes to increase growth and prosperity. There is a single objective behind all the proposals: to make Britain the best place it can be to start, run and grow a small business. To set up and run a small business takes courage, skill and determination. Those who do so take their destiny into their own hands, and create employment opportunities for others. Too often the contribution they make to our economy and society is insufficiently appreciated. Small businesses are at the heart of our communities and the backbone of our economy. Together, they make up 99% of all businesses in the UK. They employ 14.1 million people, almost 60% of private sector employment, and account for almost half of private sector turnover. Smaller businesses are much more likely to recruit people directly from unemployment. Since the economic downturn almost nine in te9 in 10 of unemployed people who found work in the private sector either started up or worked for a small business. The context These are challenging times for small businesses, with many struggling even to survive. The economy is bumping along the bottom, demand is weak and many excellent, profitable firms are unable to get the finance they need to continue and to prosper. Now, more than ever, we need our small businesses to succeed. This starts with providing the right conditions for small businesses today. But the focus of British business – and of those who want it to succeed – must also be on the global economy of the future. This report includes many ideas to support business growth in 2015, but it also looks ahead to the next decade and beyond. With anticipated changes in the domestic and global economy over that period, the importance of small businesses to our national prosperity can only grow. Most small businesses will remain small – often much to the satisfaction of those who created and run them. But among the group of five million will be a small proportion of firms – around 1 in 15 – that, at any one time, are experiencing rapid growth and generating a vastly disproportionate share of new jobs. If these firms can be helped to grow faster or for longer – or if more firms could experience similar levels of growth – our economy would be much stronger, dynamic and resilient. page 7 The need for a robust, active industrial strategy For the last three decades, the intellectual and political consensus in the UK has been to put our faith in the efficacy and efficiency of markets. The best thing that government could do was to get out of the way. The unsustainable and unbalanced nature of our economy’s growth – by sector as well as by region – has exposed the limits of this approach. Today there is a big divide in British politics is between those who believe that the best way to support balanced and sustainable growth in our economy is for government to step up, and those who cling to the notion that the government that does best is the government that does least. Such a position is outside the international consensus and is at odds with what Britain needs. An active government approach must go beyond economy wide policies to improve the conditions for growth, as important as they are. We need the strategic development of our national capabilities, building on our strengths, correcting our weaknesses and offering clear direction to actors in individual sectors and across our economy. It must shift from being passive and reactive, to proactive and strategic – and must be wholly supportive of small firms. The active, modern industrial strategy we need must support businesses during start up and growth, not forestall the demise of dying firms and industries as was tried in the 1970s. Because of the failure rate of individual firms, overall policy success requires the generation of many businesses with high potential. Supportive government policy can help to increase the success rate of more firms. The goal should be to create an environment where successful firms can flourish, not to pick individual firms. This will generate a diversified portfolio of good options for a prosperous future. The approach of the Taskforce The Taskforce Interim Report made recommendations to improve access to finance and government procurement, with reforms to government enabling it to better understand and respond to the needs of small businesses. Here we build on those recommendations. Our approach is straightforward. To achieve growth a business needs the capacity to market, develop, manufacture and sell products and services. It needs customers to serve, domestic and international. Recognising that UK firms will not prevail by competing on low cost of labour in commodity markets, the pragmatic, widespread application of innovation lies at the heart of our work. Growth must be private sector led, but government can make a huge difference. Through government procurement, it can be an exemplar client for UK business and acts as a spur to innovation. It can support world class exporting or it can be passive, leaving UK business disadvantaged in global markets. Bringing excellent, innovative products and services to market relies on two fundamental prerequisites: access to appropriate, timely finance and most important of all: access to the right skills in our people. It is possible that this can happen without government support, but how much more likely is this to occur if government steps forward to create the right climate for success. Our final area for consideration is therefore machinery of government and how it must change to be as supportive as possible. page 8 The approach of the Taskforce No two firms are the same, and the particular set of challenges faced by any business will be unique to that business. But there are problems that will be familiar to many firms at similar stages of the business lifecycle. The uncertainties and challenges of taking on a first employee are very different from the second, tenth, fiftieth or hundredth. The financing needs of a start-up anticipating high growth are very different from the self employed decorator or the mature business growing organically. We have tried to be sensitive to these differences, making recommendations that would create a supportive environment for all small businesses. Running through our recommendations is the idea of everyday entrepreneurship - supporting an Enterprising Nation. It means shifting the perception away from entrepreneurship as a niche activity: not about a group of 50 or 500 or even 5,000, but encompassing the nearly 5 million business leaders running small businesses today. In our schools, colleges and universities we need to normalise entrepreneurship as a career option, with a deliberate focus on the developing the skills needed for success. And when people feel ready and able to strike out on their own, we must de-risk it as an activity, as far as is humanly possible.   page 9 Summary of major recommendations This report contains a broad range of policy interventions as progress is required on a broad range of fronts. There are one hundred specific proposals which should be thought of as a menu of options. They are not an exhaustive list, but each would make a contribution to small business growth. The following paragraphs are a distillation of their broad direction. The full list of recommendations is set out in Appendix 2. Finance: Business lending has fallen in every quarter of the last two years. Underlying acute short term problems are longer term structural issues. ● There is a great need for a major transformation in finance for small business. Overhauling, improving and diversifying the small business lending sector should be the highest small business priority. ● Introduce local lending institutions, based on the principles underpinning the local German savings banks, the Sparkassen. We are not suggesting the wholesale transplant of an identical Sparkassen structure. The challenge is to bring the key principles to life in a British context. The prize is worth the challenge: no other measure will provide a better solution to one of the biggest issues facing small business. ● Encourage and spread the availability of patient capital with a wholesale expansion and promotion of policies like the Enterprise Investment Schemes and Enterprise Capital Funds. ● Partner with the London Stock Exchange or others to create a real competitor to the US tech market Nasdaq, increasing the availability of equity finance for businesses with rapid growth potential. Floating such firms in London is insufficiently attractive and should be seen as a strategic goal for government, rather than a source of immediate tax revenues. People and skills: The UK ranks 14th worldwide in entrepreneurial attitude ● Entrepreneurial leadership and management skills can be taught and should be taught at school and to all age groups who would benefit. Our BTEC is a good place to start. ● Self employment is a challenging but empowering path out of unemployment. The government should recognise the major increase in self-employment currently occurring and provide appropriate support. ● We cannot assume that our young people will simply acquire workplace skills by growing up: we need a formal NVQ in general employability skills. ● Our apprentice schemes need revitalising and supporting to rival the best in Europe. Customers: US Federal laws and targets ensures – de facto – that of the Federal procurement budget spend is with small businesses. The UK Government has an intention – but no statutory requirement – to use small businesses. UKTI supports 1% of exporters. ● Whitehall and local government must rediscover the value of working with small businesses, acting as lead customers and opening up government procurement to the innovation which small businesses are recognised for. ● Update Treasury rules to encourage the consideration of wider economic benefit to a community when evaluating tenders. page 10 ● UKTI provide a valuable service but it touches a tiny minority of firms. We must invest – as competing nations do – in export support if our fall in share of global exports is to be halted and reversed. Innovation: Our R&D spend has fallen whilst that of our competitors has risen. HM Treasury controls 80% of UK government R&D via tax credits. ● Establish a unified strategy for government funded R&D and exploitation. The SBRI programme is valuable but must be expanded to compete with other nations on a meaningful scale. ● Appoint an e-commerce ombudsman to ensure that powerful market positions of market leading firms are not allowed to unduly limit the growth prospects of small businesses engaged in e-commerce. ● Ubiquitous, free wi-fi supported by responsive suppliers is a key building block for continued success in digitally enabled business. Machinery of Government: The head of the US Small Business Administration reports to the President. Small business is one of the ten responsibilities of one of the six junior ministers within BIS. No one reporting to the Permanent Secretary in BIS is solely responsible for small business. ● Like our major competitors we need a dedicated small business agency ● The Prime Minister needs to bring urgency and cross-government focus to the support of small business by creating a “Business COBRA”. ● A Director of Economic Development should be appointed in every government department to drive the execution of innovation policy throughout Whitehall. ● The government should work with business organisations like the FSB, the British Chambers of Commerce and others to increase membership and to create united and representative local voices for business. ● The taxation system and its administration must be simplified to reduce the 36 days small businesses spend each year on compliance. ● Reform insolvency laws to protect small business from rogue directors and protect honest entrepreneurs from needless liquidation. As a concept, small business is cherished in Britain. But its strategic importance is not always fully recognised. We may understand that all big businesses where once small, and that among small businesses of today are some of the giants of tomorrow. But fewer people recognise the absolutely central role of small business in extending opportunity, enriching our communities and driving economic growth. The focus on small business in this report is not to denigrate the importance of big business. Britain's economy is profoundly reliant on BP, Rolls-Royce, Vodafone and the rest of the FTSE. These firms create wealth and offer wonderful career opportunities. But by themselves they will not create the jobs we need for our almost one million unemployed young people, those going through our education system, and those displaced by the ongoing economic malaise. It is our small businesses that are giving the first opportunities to nine out of ten people moving out of unemployment. It is through small business that people are taking control of their own lives as well as creating opportunities for others. And it is from small business that so many of the new ideas will come which will improve our lives and enable us to pay our way in the world. page 11 That is why there is a single objective behind at the proposals in this report: to make Britain the best place it can be to start, run and grow a business. Financial Impact UK small businesses are at the bottom of the pack in productivity growth, compared with European rivals. If the UK could halve the gap in performance versus the EU average our calculations show that this would be worth the equivalent of £140bn of growth in the economy and 380,000 new jobs over the next 10 years. If we could close the gap with Germany this would more than treble (See Appendix 5). page 12 1. Introduction Nearly 5m UK small businesses, up from less than 1m in 19731 9 out 10 unemployed who find work join or set up a small business2 7% of firms are small businesses that create more than half the new jobs3 To set up and run a small business takes courage, skill and determination. Those who do so take their destiny into their own hands, they create jobs and career opportunities for others, and they generate taxes that fund public services. Too often the contribution they make to our economy and our society is insufficiently appreciated. These are challenging times for many small businesses, struggling even to survive. With our economy bumping along the bottom, demand is weak and many excellent, profitable firms are struggling to get the finance they need to continue and to prosper. Now, more than ever, we need our small businesses to succeed. And now, more than ever, our small businesses need a government that understands the challenges they face, that shares their ambition, and is willing to act to help them to succeed. This attitude is vital today, but it will be even more critical in the years to come. With our economy still in a fragile state, British politics is understandably focused on securing a return to sustained and robust growth. This is an important and necessary goal, but it is insufficient. The concern for growth today must not distract us from the need to prepare for the demands of the future. The focus of British business – and of those who want it to succeed – must be on the global economy of the future. The report takes as its starting point what we need to do support business growth in 2015 but also looks ahead to the next decade and beyond.                                                                                                                             1 Bolton, J. E., Report of the Committee of Inquiry on Small Firms, Cmnd 4811, HMSO, London, 1971 2 Unwin, P., and Buscha, F., Back to work: the role of small businesses in employment and enterprise, London: Federation of Small Businesses, 2012 3 The vital 6 per cent: How high-growth innovative businesses generate prosperity and jobs, NESTA Research Summary, London: NESTA, London, 2009, p2. The 6% figure in the report referred to the share of all surviving UK firms employing ten or more people in 2002 that accounted for 54 per cent of all jobs created between 2002 and 2005 by established firms employing ten or more people in 2002. This excluded: jobs created by surviving businesses with fewer than ten employees; jobs created by new firms; jobs created by the public sector; self- employment. The analysis included all jobs gained by surviving firms, whether by organic growth or acquisitions of existing firms. NESTA now use 7% instead of 6%, based on reanalysis of the data following ONS reclassification. page 13 Strategic context As the march of technology continues and the global centre of economic gravity shifts south and east, we are living in a world of short term constraints but longer term opportunities. Nations which pursue the right policy mix to inspire growth in the short term and position themselves for the next decade will enjoy a disproportionate purchase on prosperity. We suggest seven trends are likely to shape the environment for UK enterprise in the future: • We envisage a world where markets have become more global, although more fluid and micro, with a premium on quality goods and services. • These changing market opportunities are likely to give advantages to firms with flat structures, collaborative approaches, and the advantages of proximity – the ability to draw on all the ingredients necessary for success within their own locality. Paradoxically, the orientation towards the global will intensify the importance of vibrant local economies, with competition to satisfy the wants of demanding local consumers driving quality, and an enterprise culture supplying the capabilities to innovate with speed, to access global and local market opportunities. Seven trends shaping the business environment in the future 1. A global future: The painful challenges which many western economies have faced in the past five years should not blind us to the fact that for much of the planet this same period has been one of feast, not famine. The rise of China and India, the economic emergence of the likes of Indonesia and Vietnam, the astonishing economic growth enjoyed by Brazil which may soon be echoed by Mexico and the transformation of many parts of Africa are events of fundamental historical significance. Between 2010 and 2025 some 75 per cent of global growth will be in these "emerging" economies who by 2025 will account for more than half of global output. By then the nature of the international customer base for enterprise will have been altered completely with an additional $30 trillion of demand from a new global middle class. This will be the largest economic shift in history, bigger than the Industrial Revolution and on a much compressed timescale.4 We will have moved from an era we have called “globalisation” to something that might be better described as “economic democratisation”, with huge opportunities for countries prepared to succeed in export markets. 2. A micro future: Combined with technological change, this far larger pool of customers will lead to a much larger number of small businesses, not a smaller number of large businesses. This development was covered in The Long Tail by Chris Anderson and illustrates how and why mass markets serving undifferentiated demand will fragment into a proliferation of esoteric but profitable niche markets. For much of British business, small will be the next big thing. 3. A fluid future: Different customers must mean different sorts of producers, as markets become more restless, more disruptive and more unpredictable. What was once static will rapidly become fluid. Firms who thrive in this environment will be those who can adapt swiftly to these constant shifts. This will create challenges not                                                                                                                           4 Winning the $30 Trillion Decathlon: Going for Gold in Emerging Markets, McKinsey & Company, 2012 http://www.mckinsey.com/features/30_trillion_decathlon page 14 just for business, but also for ministers, officials and regulators who will need to acquire the institutional elasticity needed to keep pace with the commerce of tomorrow. 4. A quality future: There will be few if any areas in 2025 where British business will dominate markets by the provision of low-cost and low-quality products. Even in very local, purely domestic provision, quality will be essential to survive and succeed. Quality will depend on the skills of those involved in marketing, developing, manufacturing and servicing that which others wish to own, whether goods or services. A 50 per cent society which expects half of the population to acquire only lower level skills will get what it deserves: 50 per cent results. Only a 100 per cent society will get a 100 per cent outcome. 5. A flat future: Companies will not render themselves fluid by adopting rigid managerial hierarchies but by empowering all who work within them to make meaningful suggestions and take fundamental decisions. Sharp distinctions between “management” and “workers” will be hopelessly outdated. 6. A collaborative future: Creating goods and services of consistently high quality and at the pace demanded by fluid markets requires strength in numbers – utilising so-called “agglomeration benefits” that arise from clusters of similar businesses. While the classic image of the entrepreneur may be the pioneering individual, the experience of successful entrepreneurs will be increasingly cooperative with fresh ideas coming from thick, collaborative networks and often at the boundaries between organisations and disciplines. 7. A proximate future: Strong local economies are a prerequisite to global success, not an alternative. The capabilities for a firm’s success will be drawn from strong local communities– from the networks of skilled workers to the supply chains to the finance needed to thrive and grow. Firms will develop the disciplines needed to succeed in whichever market they choose by exploiting strong local economies with competitive markets and demanding consumers. Whether firms aspire simply to serve their local communities or to play in global markets, success will begin at home. The critical importance of small businesses If we are only right about some of these trends shaping the outlook for UK business over the next decade, the importance of small businesses to our national prosperity can only grow. When Britain joined the EEC in 1973, it had less than a million small businesses.5 The consensus then was of a future world dominated by a small number of very large corporations exploiting massive economies of scale. Today, the number of small and medium sized businesses is closer to five million. They make up 99% of all businesses in the UK, and employ 14.1 million people, almost 60% of private sector employment, and almost half of private sector turnover.6                                                                                                                 ��         5  Bolton, J. E., Report of the Committee of Inquiry on Small Firms, Cmnd 4811, HMSO, London, 1971   6 http://www.bis.gov.uk/assets/biscore/statistics/docs/b/12-92-bpe-2012-stats-release.pdf table. There are 4.8 million private sector businesses in the UK. Almost all (99.2%) of these are small businesses (less than 50 employees). Around 0.6% are medium sized (51 to 250 employees) and just 0.1% employ more than 250 people. page 15 Most small businesses will remain small – often much to the satisfaction of those who created and run them. They will remain at the heart of our communities and the backbone of our economy. But even firms destined to remain small will face challenges of adapting to the changes in the business environment over the next decade – from the newsagent to the boutique digital content agency. Indeed, small firms already face a dynamic environment where entry and exit rates typically amount to 10% of businesses each year. President Clinton said recently that he worked on the basis that around a tenth of jobs with become obsolete each decade. To succeed in this future we will need not only to generate new businesses, but also new technologies, new markets and whole new industries. Small businesses also play a critical role in extending opportunity. Enterprise is a route by which people can get on, taking greater control of their own lives. This desire to “be your own boss” is the most frequent reason those running small businesses give for doing so. But small businesses are also a critical first rung on the ladder of opportunity for many others. Where larger businesses recruit more frequently from the ranks of those already in work, smaller businesses are much more likely to recruit people directly from unemployment. Indeed, since the economic downturn almost nine in ten of unemployment people who found work in the private sector either startup or work for a small business.7 Every big business was once a small business. Among the group of five million will be a small proportion of firms that, at any one time, are experiencing rapid growth. The impact of these so-called ‘gazelles’ on the economy overall has been well documented. Nesta’s influential summary of the research reported that, “just 6 [now revised to 7%] per cent of UK businesses with the highest growth rates generated half of the new jobs created by existing businesses between 2002 and 2008”.8 If these firms can be helped to grow faster or for longer – or if more firms could experience similar levels of growth – our economy would be much stronger, dynamic and resilient. The need for a robust active industrial strategy With the importance of small businesses to our economy and society set to rise, what can be done to support this growth? As Nigel Doughty put it, what must be done to “Fulfil the promise of British Enterprise”? For the last three decades, the intellectual and political consensus in the UK has been to put our faith in the efficacy and efficiency of markets. The best thing that government could do was to get out of the way. The unsustainable and unbalanced nature of our growth – by sector as well as by region – has exposed the limits of this approach. Now, from Investing for Prosperity – the report of the LSE’s Commission on Growth – to Lord Heseltine’s No Stone Unturned, this consensus is being challenged. It is challenged by the approach taken by President Obama’s Jobs Act, and by the reality – if not the rhetoric – of US policy over a much longer period. It is challenged by the approach taken in countries around the world at all stages of development. The Taskforce observed this directly during visits to Singapore, Germany and the USA.                                                                                                                           7 Unwin, P., and Buscha, F., (2102) Back to work: the role of small businesses in employment and enterprise, London: Federation of Small Businesses 8 The vital 6 per cent: How high-growth innovative businesses generate prosperity and jobs, NESTA Research Summary, London: NESTA, London, 2009, p2. See footnote 3 for more information. page 16 Today there is a big divide in British politics between those who believe that the best way to support balanced and sustainable growth in our economy is for government to step up, and those who cling to the notion that the government that does best is the government that does least. Such a position is outside the international consensus and is at odds with what Britain needs. Without time to develop and patient finance too many small companies go under, fail to grow or are sold. Elegantly operating in an orthodoxy that is out of date will fail to meet the challenges ahead. An active government approach must go beyond economy wide policies to improve the conditions for growth, as important as they are. We need the strategic development of our national capabilities, building on our strengths, correcting our weaknesses and offering clear direction to actors in individual sectors and across our economy. It must shift from being passive and reactive, to proactive and strategic – and wholly supportive of small firms. An unbalanced economy The reliance on market forces over the last three decades had many positive consequences, including new investment into the UK from abroad and some welcome improvements in productivity. But it also created large imbalances within our economy. Retail, financial services and professional services thrived in the new environment, along with media, telecoms and pharmaceuticals. But manufacturing was decimated, from commodity products and raw materials through even to hi-tech products. The scale of change is important. Manufacturing’s share of UK GDP fell by more than 10 percentage points between the mid 1980s and 2010. If the productive base of the economy is to be broadened and re-balanced then the scale of the change needs to be of a similar order. There will be a number of elements to this transformation. But, investment in a large number of small and medium sized innovative concerns represents the best bet for the UK. They will form the basis for creating the large UK companies of the future. Also, they are the most reliable way of creating new jobs in a sustainable and affordable manner. In the 1960s and 1970s, government intervention in the economy involved attempts to support larger firms struggling to survive because of competition from abroad. This was often intervention when a significant business or industry was in trouble and about preventing collapse or decline. This has been dubbed ‘losers picking government’. Today, an active approach must focus on supporting businesses to start and grow, not to forestall the demise of dying firms and industries. It must stimulating the growth of large numbers of smaller firms, producing high value goods and services, and able to compete with the best in the world. This will take creativity and patience, as well as an acceptance that along with the successes there will be failures too. There will always be risks in business, and supporting business growth will involve risk too. But not doing so carries greater risk. The goal is absolutely not to ‘pick winners’ but to develop strategic support for sectors and a plentiful portfolio that secures options for future growth. In the last century, in corporations and in governments, decision making tended to come from the centre, relying on the talents of the few and the compliance of the many. Today, successful firms are often nimble and flat. They harness the talents of the many, and empower those who are intimate with the markets they serve. Smart governments must recognise the critical importance of proximity – of regions having appropriate control of the ingredients for economic success. Silicon Valley entrepreneurs have all the ingredients for page 17 success at their fingertips. The financiers are right there in Palo Alto, California. Government officials from the SBA are nearby. Citizens, too, are more likely to accept responsibility for their economic future if they have in their hands the means to determine it. Small business at the centre of 21st Century industrial strategy An active, modern industrial strategy must support businesses during start up and growth, not forestall the demise of dying firms and industries. Large companies can excel at applying and developing innovative ideas. But it is small firms they rely on for their supply chains and it is often in small firms where ground-breaking new products and services are created. With these innovations can come periods of rapid growth, new jobs and export success, and creates the vibrant supply chains that larger firms need. This kind of success takes creativity, patience and a tolerance for failure. The technology start-up companies can take 12-15 years to move from the initial concept to when it can generate investment funds on its own. Because of the failure rate of individual firms, overall policy success requires the generation of many businesses with high potential. Supportive government policy can help to increase the success rate of more firms. The goal should be to create an environment where successful firms can flourish, not to pick individual firms. This will generate a diversified portfolio of good options for a prosperous future. The approach of the Taskforce The Taskforce Interim Report made recommendations to improve access to finance and government procurement, with reforms to government enabling it to better understand and respond to the needs of small businesses.9 Here we build on these recommendations. Our approach is straightforward. To achieve growth a business needs the capacity to market, develop, manufacture and sell products and services. It needs customers to serve, domestic and international. Recognising that UK firms will not prevail by competing on low cost of labour in commodity markets, the pragmatic, widespread application of innovation lies at the heart of our work. Growth must be private sector led, but government can make a huge difference. Through government procurement, it can be an exemplar client for UK business and act as a spur to innovation. It can support world class exporting or it can be passive, leaving UK business disadvantaged in global markets. Bringing excellent, innovative products and services to market relies on having access to appropriate, timely finance and – most important of all – access to people with the right skills. It is possible that this can happen without government support, but how much more likely is this to occur if government steps forward to create the right climate for success? Our final area for consideration is therefore machinery of government and how it must change to be as supportive as possible.                                                                                                                             9 Fulfilling the Promise of British Enterprise, Interim Report by Nigel Doughty, Chair of Labour’s Small Business Taskforce, 2011, http://www.labour.org.uk/uploads/5c176b69-38c4-19b4-05d0-ff3eae06b37d.pdf page 18 Chart 1: The approach of the Taskforce No two firms are the same, and the particular set of challenges faced by any business will be unique to that business. But there are problems that will be familiar to many firms at similar stages of the business lifecycle. The uncertainties and challenges of taking on a first employee are very different from the second, tenth, fiftieth or hundredth. The financing needs of a start-up anticipating high growth are very different from the self employed decorator or the mature business growing organically. We have tried to be sensitive to these differences, making recommendations that would improve the supportive environment for all small businesses. To take the critical issue of finance as an example, we have looked at where there are broken links in the chain of finance for business growth, but also on increasing the diversity of financing options for business at every link in that chain. Running through our recommendations is the idea of everyday entrepreneurship - supporting an Enterprising Nation. A lot of the discussion about entrepreneurship tends to focus on the unique characteristics of extraordinary people with unlimited appetites for risk. Such heroic people do exist and they have the potential to make a huge difference to our economy and society. But the key to an Enterprising Nation lies not in encouraging excessive risk taking, but in reducing the risks entrepreneurs must take to start and grow a business. It is inevitable that small businesses must take risks, but the factor that distinguishes high performance ventures is their ability to manage that risk.10 It means shifting the perception away from entrepreneurship as a niche activity: not about a group of 50 or 500 or even 5,000, but encompassing the nearly five million business leaders running small businesses today. In our schools, colleges and universities we need to                                                                                                                           10 Burke, A. E, (2009), Strategies for Entrepreneurial Success, Journal of Strategic Management Education, 5(1), 33- 44; Reis, E. (2011), The Lean Startup, New York: Crown Business page 19 normalise entrepreneurship as a career option, with a deliberate focus on the developing the skills needed for success. And when people feel ready and able to strike out on their own, we must de-risk it as an activity, as far as is humanly possible. This report contains a broad range of policy interventions as progress is required on a broad range of fronts. There are one hundred specific proposals which should be thought of as a menu of options. They are not an exhaustive list, but each would make a contribution to small business growth. Chapter 2 makes recommendations on the critical issue of improving access to finance – aiming to increase the range of options open to small businesses whatever their size or ambitions for growth, as well as the variety of providers within each option. Chapter 3 focuses on how to enhance the skills of entrepreneurs and the people they employ. Chapter 4 is concerned with improving routes to market at home and abroad, as well as the role of government as a customer. Chapter 5 makes recommendations on how to improve support for innovation. Chapter 6 looks at the changes needed to government itself, so that it can perform its role in supporting small business as effectively as possible. Finally, the Concluding remarks emphasise the choice facing governments: to allow small business to rise and fall with the markets or to intervene to provide active support to make a real difference. Financial Impact UK small businesses are at the bottom of the pack in productivity growth, compared with European rivals. If the UK could halve the gap in performance versus the EU average our calculations show that this would be worth the equivalent of £140bn of growth in the economy and 380,000 new jobs over the next ten years. If we could close the gap with Germany this would more than treble. The methodology is set out in Appendix 5.   page 20 2. Finance: Proximity, Diversity, Equity In the decade before the crisis, 84 per cent of the money lent to British residents by British banks went into property and financial services11 More small business loan applications are unsuccessful in the UK than in our main competitor countries12 Community banks in the USA, the local Sparkassen in Germany were relatively unaffected and continued to serve their communities after the crisis hit13. There is widespread dissatisfaction with the ability of the big banks to meet the financing needs of small businesses. This problem is particularly acute in the short term. According to the Bank of England, net lending to business only been positive in 6 over the last 24 months, falling by more than £28bn over the same period. This is despite attempts at a succession of ideas and schemes by the Government - from Project Merlin, to the National Loan Guarantee Scheme or credit easing, and now Funding for Lending - to increase the flow of finance to business. These ‘fixes’ have not worked, in part because this is a problem with deep roots. As long ago as the 1930s with the identification of the Macmillan Gap, policy makers have been concerned with the failure of the banking and finance industries to serve the needs of real economy businesses in the UK. The Taskforce has considered improvements that could be made across has made across all dimensions of finance for small firms, covering: • Bank lending • Equity (from private sector investment funds) • Personal investments (from founders and business angels) • Listing on public markets • Alternative finance There are well known - but still unresolved - problems in the chain of finance for growing businesses which our recommendations address. The major gaps are higher risk lending, venture debt and early stage venture capital. But we have also looked at how the options at every link in this chain can be improved. In finance for small businesses, as in life, variety is a valuable end in itself. It is better suited to the variety among the small business population it serves. But it is also likely to be more effective. In contrast to the centralised and homogeneous business models across our big banks, it can draw on much richer seams of expert or local knowledge. Together, the proposed package of reforms we recommend would enable the revolution in finance for small firms that is long overdue.                                                                                                                             Calculations based on Bank of England data, from Weldon, D., ‘A Diverse Banking System’ in Harrop A (ed.) The Great Rebalancing, London: The Fabian Society, 2013 12 http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/4-03102011-AP/EN/4-03102011-AP-EN.PDF 13 See, for example, Germany: Technical Note on Banking Sector Structure, IMF, Washington DC, 2011; Michie, J. and Llewellyn, D. T., Converting failed financial institutions into mutual organizations, Journal of Social Entrepreneurship, 1 (1), 2010.   page 21 Chart 2. Taskforce recommendations would improve financing options for all small firms Bank lending Net business lending has fallen every year since 200814 UK bank debt rejection rates rose from 5.6% to 20.8% between 2007 and 201015 Britain’s banking sector offers limited choice to small businesses. Most of the market concentrated among a small number of large banks, each with a similar business model. This concentration and homogeneity does not serve the diversity of small business needs well enough, while making it difficult for new entrants to enter the market. We need a far more diverse small business banking services sector to give our small businesses the best access to financial services in the world. Problems with banks are numerous and well documented. Debt finance is difficult to obtain. Project Merlin – the Government’s deal with banks to encourage further lending - has been unsuccessful in driving a significant improvement in credit availability. Net UK business lending has fallen every year since 2008.16                                                                                                                           14 http://www.bankofengland.co.uk/publications/Documents/other/monetary/trendsjanuary13.pdf 15 http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/4-03102011-AP/EN/4-03102011-AP-EN.PDF 16 http://www.bankofengland.co.uk/publications/Documents/other/monetary/trendsjanuary13.pdf page 22 Banks state, correctly, that they would lend more if additional lending were profitable. However the constraint on that profitability is often banks’ own ability to price lending risk correctly. Having systematically diminished the role of local bank managers over decades, banks lack local staff competent to make sound discretionary lending decisions to small businesses – the empowered local bank managers of the past. As a result, British bank loan rejection rates are among the highest in Europe.17 Envious eyes have been cast towards Germany, and its network of local lending banks, the Sparkassen. The German Sparkassen system is comprised of credit institutions established under public law. These essentially local banks are complemented by regional banks and the KfW (this is the government owned development bank, similar in concept to the British Investment bank, the rationale for which was argued in Nick Tott’s recent report for Labour’s policy review). There are 426 independent banks that make up the Sparkassen system, with over 15,000 branches in Germany.18 They have a 40 per cent market share of business/customer deposits and loans. Savings banks have a public service obligation, which includes universal banking and small business loans. This is established by law at the regional level. These banks have persisted in Germany because of the stability built in by municipal law. In most other European countries they would have been vulnerable to takeover by much larger institutions. Banks are obliged to have a solid risk strategy supervised by the overall Savings Bank Finance Group. No bank required bailing out during the financial crisis. The network of savings banks has one IT structure and one joint liability scheme. They specialise in “relationship banking” – quick decisions taken at the local level by local managers. Most of these managers come up via apprenticeships rather than Higher Education. Indeed, the success of the Sparkassen is built on three concepts of proximity: ■ An individual bank must operate only within its designated geography; ■ All loan decisions must be made by people located at that particular bank in that geography; ■ The people making those decisions live in that geography giving them contextual knowledge. While the particular Sparkassen model may be specific to Germany, the characteristics that make it successful – of genuine proximity, creating deep expertise within a geographically mandated area – is not. This can be part of the future for small business banking in the UK.   There are a number of examples of ideas that are emerging or being developed in localities. For example: ○ Nationwide building society has expressed its intention to enter the market for small business lending from 2014. ○ The development of the Bank of Salford is a good example of local authorities in the vanguard of new solutions as are local authorities working with Funding Circle to create local funding opportunities. ○ Members of the Shadow Team Chris Leslie and Gareth Thomas have also published a policy review document supporting the development of credit unions as an                                                                                                                           17 http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/4-03102011-AP/EN/4-03102011-AP-EN.PDF 18 http://www.dsgv.de/_download_gallery/Englisch/E_DSGV_Flyer11_120711_final.pdf page 23 additional source of small business finance. The TUC also support a greater role for credit unions and mutuals within a more diverse banking sector.19 ○ Other alternatives might be to consider the potential to leverage national savings as a source of capital or for joint ventures between local authorities and commercial banks, perhaps with local authorities borrowing against future revenues. There is no need to limit this future to the development of one particular model: the objective should be to create an enabling environment in which a diverse family of solutions could flourish. Proximity can work for British banks too. Santander UK has expanded its small business banking rapidly (18% B2B lending growth in 2012 vs. 4% market decline) with an approach which champions local “credit partners” who make lending recommendations alongside local “relationship directors”. Santander UK believes that its localism enables better financing solutions, risk assessment and decision making. Banks’ reliance on centralised, pattern-based credit decision making is compromised by poor data availability: small business credit scoring is typically far less sophisticated than consumer credit scoring. The bank account data necessary for assessing companies more effectively is kept relatively inaccessible by banks who only permit unwieldy manual downloads of recent (typically 4-8 weeks) transactions. This makes it hard for competitors to decide to lend to the same businesses in the way that, for example, On Deck Capital enables in USA. On Deck Capital is a US small business lending company started in 2007. They offer loans from third parties of up to $150,000 approved in as little as one business day. Lending is based on the “On Deck Score” which is a business credit score developed with Equifax. On Deck’s platform allows businesses to create profiles, which link to electronic data sources, including online banking, accounting and merchant processing (and aggregates social, tax, and industry data), so third party banks and lenders can more easily access a potential borrower’s complete financial profile. This saves lenders from the hassle of collecting the data themselves, or relying on personal credit scores to evaluate credit. The company already has four regional offices in addition to its headquarters, more than 140 employees and has issued more than $350 million20 in loans. On Deck uses technology to identify credit-worthy businesses that may struggle to get capital from banks. To help extend bank lending to businesses perceived to be higher risk, the Enterprise Finan</p>