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A new government-backed venture capital fund would boost UK productivity

Christian Stensrud, 2 September 2016

At the first cabinet meeting since the summer recess, Theresa May gave a list of crucial government reforms. Near the top of the list was the need to tackle the UK’s ongoing productivity problem.

Small and medium-sized enterprises (SMEs) will play a crucial role in addressing this problem. In 2015, SMEs accounted for 60 per cent of all private sector employment, 47 per cent of all private sector turnover and 99.9 per cent of all private sector businesses. Because SMEs make up the majority of private sector employment and almost half of private sector turnover, boosting their productivity growth will have a huge impact on the UK’s overall productivity.

But how do you increase an SME’s productivity? According to research, SMEs that engage in international activity are more likely to innovate and improve their performance, including productivity growth. In other words, encouraging an SME’s exports will usually boost its productivity.

There is significant scope within the UK to expand SME exports; in 2015 approximately 110,000 SMEs could have either started exporting or increased exports. However, certain constraints blocked off this possibility. One of the biggest reasons for UK SMEs limited engagement in exporting is their lack of ambition to grow and internationalise. According to the Global Entrepreneurship Monitor, UK SMEs have less desire to grow and internationalise than SMEs in other G8 economies. In the UK 17 per cent of entrepreneurs had growth aspirations compared to 27 per cent in the US.

There are two reasons for this lack of ambition: lack of finance and lack of knowledge regarding how to export. The UK has made vast strides over the last decade concerning SME financing, via the British Business Bank, and policies that have extended knowledge to SMEs, via UK Trade & Investment. But current measures will not solve the SME ‘ambition gap’.

One significant measure that could help solve the ‘ambition gap’ would be to open up venture capital funding to UK SMEs that show export potential. This new venture capital fund, backed by the government, would target SMEs and help them increase their exports.

A venture capital fund should be used because it would solve both the financing and knowledge issues faced by UK SMEs. Concerning financing, a venture capital fund invests in companies who show growth potential, usually taking an equity stake. Concerning knowledge and expertise, a venture capital fund takes a hands-on role within a firm it has invested in, usually seeking board membership. The venture capital fund usually supplies the firm with management expertise, support and access to their contacts. A UK venture capital fund would give UK SMEs both the finance and knowledge they need to boost exports and productivity.

A good model for this new venture capital fund exists just over the Irish Sea: Enterprise Ireland. Enterprise Ireland is a state agency that works with Irish enterprises to help them start, grow, innovate and win export sales in global markets. Whilst Enterprise Ireland offers many services to Irish exporters, venture capital funding plays a key role. In 2015, the combined size of funds established under Enterprise Ireland’s seed and venture capital schemes was €1.5 billion. In  the same year, three such funds, supported by Enterprise Ireland through the Development Capital Fund Scheme, invested over €75 million in mid-sized Irish companies. Last year, Enterprise Ireland financially supported 217 start-ups, trained 290 managers to grow their business and helped 429 companies establish new overseas presences.

SMEs make up a huge part of the UK economy so upcoming SME policy will show just how serious the UK government is about tackling productivity. If the new government is serious, creating a government-backed UK venture capital fund could provide a lot of the support that UK business needs.

1 comment on “A new government-backed venture capital fund would boost UK productivity”

  1. How do you increase an SME’s productivity?

    UK SME’s has the opportunity to enhance its productivity by employing UK local labour-force. Since 2004 sourcing direct cheaper labour from EU A8 A2 countries where average salaries are lower. UK becomes attractive place to work & live if for EU A8 A2 countries and you’re a young single childless worker, or a middle age worker. For example because of a person temporary circumstances, if this person lives with 4 to 6 people in a house who also in the same situation, where accommodation is provided by the business, their cost of living in UK is reasonable, their motivation to work in UK is to spend less, save money, to send back home in to build a house in europe.

    Win/Win

    (UK business keeps cost down through low-wage: minimum wage, zero hour contracts, employ more people for less),

    (EU worker makes twice as much money than they would have made in A8 A2 country, and pay no income tax)

    Lose/Lose

    (UK middle taxpayers) faced with on-going burden subsidising businesses that do not pay living wage, taxpayers foot the bill and the welfare state expands

    (UK employment) it removes multiple job opportunities off the job market that could have been filled by UK workers. If you were standing in the shoes of UK unemployed worker, looking at this from there perspective they would still value UK as home, and the job opportunity as livelihood

    Downside low-wages : accordingl to CitizensUK.org April 2015 – Taxpayers spend £11bn to top up low wages paid by UK companies, big 4 supermarkets costing just under £1bn a year in tax credits and extra benefits payments because of low wages which have a negative knock on effect

    Low wages depresses wage growth, increases job insecurity, higher rate of employee turnover can lead to lower employee productivity which eats into profits. High turnover of staff has detrimental impacts on performance and affects productivity. Businesses that do not pay decent wages will lose best workers to competitors or other companies

    SMEs need to open up job opportunities to UK job market and reach wider geographic spread of people, before sourcing workers directly from the EU

    Any UK business operating in the UK that is heavily reliant on ‘low-wage’ overseas workforce has a flawed business model. If capabilities of a worker exist in the UK its more economical and beneficial to retain skillset from within UK.

    Before 2008 recession (even before 2004) UK productivity was strong; after 2008 UK productivity performance weakened in comparison to other G8 economies: Canada, France, Germany, Italy, Japan, Russia, & United States

    BIS estimated in 2015 UK businesses :
    5,147,000 micro businesses 0–9 Employees, £673bn turnover
    204,000 small businesses, 10–49 employees, £543bn turnover
    33,000 medium businesses, 50–249 employees, £538 bn turnover
    7,000 large businesses, 250+ employees, £1,956bn turnover

    SME businesses need to continually improve their business. If small businesses intend to grow and compete with the best companies they need to be leaner, invest in right people (top down/bottom up), really know who are your customers, innovation (products services), technology, be international focused, think globally about geographical markets

    Industrial Revolution began in Great Britain

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