Why quantity isn't the same as quality
In Lord Young's recent report on small firms he suggested that if we had the same start-up rate as the United States, the UK would have an extra 900,000 businesses. That would bring the UK's enterprise population - 99 per cent of whom are small and medium sized businesses - to about 5.5 million businesses.
The conventional wisdom is that if you have more businesses this adds to the vibrancy of the UK enterprise population. More is better because it creates jobs, potentially increases innovation and goes on to increase competition.
It would be churlish to deny that some new firms are important to economic development. Just think of Facebook or Google. Such businesses, though, are not the typical start-up. The truth is that very many new firms are 'me, myself and I' businesses that simply compete - mostly along the same lines - with other existing businesses in their sector. They also often don't hang around long enough.
This is important because it is easy to look at the short term job creation advantages of new firms but ignore the long term impacts. In the short term, what you see is a new firm boosts employment. That looks great. But what you have to factor in is that very many new businesses are likely to fail.
Our best estimates suggest that about 40 to 50 per cent of businesses are likely to fail by their fifth year. Over the long term, what you see is that new firms create jobs but they are also the most likely source of job losses. What this translates out to is a lot of churn but not necessarily much in the way of economic development.
What an economy needs are growing businesses. That is perhaps the best way to increase total jobs in the economy. Our track record, like that of the Europeans, shows that if you compare us to the US what you find is that the US is a better place for growing businesses.
A study by Bartlesman et al (2005) showed that US new firms actually started smaller than EU businesses but, crucially, went on to grow more strongly than EU businesses. In the UK, of course, we have had some successes (e.g. Codemasters, Autonomy) but not that many and certainly not at the level of the US. Is this because there are too 'few' start-ups or is it because businesses are not growing?
I would say that the answer can be seen by looking at the shape of the enterprise populations of two other OECD countries.
One is New Zealand. It is a great place. It certainly has better weather than us. It also regularly tops the World Bank's league table as being one of the easiest places in the world to set up a business. As a consequence, there are heaps of start-ups there. We, however, don't typically compare ourselves with New Zealand.
The other OECD country is the US. What distinguishes the UK and the US is not the suggested differences in start-up rates. Instead, it is that the US has proportionately more large sized businesses than other OECD countries.
Even in Europe, Germany has more medium-sized businesses (50-249 employees) than we do in the UK.
My argument then is that the deficit the UK faces is not in terms of start-ups but in getting our existing businesses to grow.