Social science research has helped to influence policy aimed at reducing barriers to small and medium-sized business growth, which account for over 99% of private sector businesses in the UK.
Summary
Despite accounting for over 99% of firms and employing 16.7 million people in 2023, small and medium sized enterprises (SMEs) face a number of barriers to growth compared with larger firms, as they are viewed as riskier opportunities by potential investors.
Research by Professor Ross Brown at the University of St Andrews has sought to understand these barriers and explore how public policy can foster an environment of SME investment, innovation and growth.
Encouraging innovation: enabling SMEs to grow in the face of uncertainty
“…[Brown’s] work fed into our thinking on discouraged borrowers, and more recently on the specific relationship with innovation will also help us better develop and target our policies.”
Chief Statistician Department for Business, Energy & Industrial Strategy, 2020
The challenge
In 2023, there were over 5.5 million small and medium sized enterprises (SMEs) in the UK, accounting for over 99% of firms and employing 16.7 million people – roughly 60% of private sector employment. Therefore, their role in the UK economy is vital.
But SMEs face a number of barriers to growth compared with larger firms, including accessing external finance, taxation and staff recruitment. External finance is crucial to the growth and development of SMEs, however they are often viewed as riskier opportunities by potential investors often because of unstable cash flows and small fixed assets bases which are insufficient to pledge as necessary collateral for investments. As a result, despite their importance to the UK economy, SMEs are less able to access external finance for growth and as such are less resilient to unexpected events, such as Brexit and the Covid-19 pandemic, and therefore face increased uncertainty.
The research
Professor Ross Brown at the University of St Andrews used UK Government survey data on the finances of almost 40,000 SMEs in the UK between 2011-2013 to understand the extent to which SMEs were applying for bank finance and the outcomes of these applications. The findings indicated that SMEs located in peripheral regions were more likely to be discouraged from applying for finance and that those who did were more likely to have their applications for finance rejected, even when controlling for factors such as credit score. These findings also indicated that one in 10 SMEs are unlikely to apply for finance altogether because they did not expect to be successful and that this was particularly true for those SMEs who have between one and nine employees, in addition to those located in peripheral regions.
Following the Brexit referendum, further research was conducted to understand the potential impacts of the outcome on SMEs. Although SMEs can be quick and nimble to deal with changing circumstances, lack of financial and human resources can make it difficult to have the necessary preparations in place for such events. Using a further longitudinal survey of UK SMEs Professor Brown found that the likely impacts of Brexit on SMEs were going to depend on various factors including firm size, age, industry and location, but that many SMEs had scaled back plans for capital investment, innovation and exporting due to uncertainty surrounding Brexit.
The Covid-19 pandemic offered further challenges to SMEs, with many temporarily or permanently ceasing trading and others seeing dramatic declines in revenue. Professor Brown’s research into this suggested that a lack of external funding and precautionary cash reserves left many SMEs vulnerable to bankruptcy.
In light of all of this, insights from research by Professor Brown, commissioned by the Organisation for Economic Co-operation and Development (OECD), found that policy which cultivated a holistic approach to create a particularly supportive environment characterised by a core of large established businesses, re-investment to support new entrepreneurial activity, and shared information was needed to facilitate SME growth. In addition, the availability of finance, entrepreneurial culture and presence of large firms, universities and service providers were all factors in the extent to which SMEs are able to flourish.
The impact
The insights from this research have been used at a UK-level to influence and inform thinking around policies introduced by the Department of Business Innovation Energy and Skills, and the British Business Bank which have targeted support towards reducing SME barriers to finance in geographic areas where access is more challenging and borrow discouragement is higher. This included through schemes such as: Northern Powerhouse and Midlands Engine Investment Funds and the Help to Grow programme.
Since 2016, Professor Brown has advised the Scottish Parliament Information Centre (SPICe), Scottish Enterprise and the Federation of Small Business, Scotland on the interventions needed in order to alleviate pressures facing SMEs following Brexit. This led to Scottish Enterprise administering the Scottish Government’s Brexit Support Grant which provided £2 million in funding for Scottish SMEs.
Furthermore, Professor Brown advised the Scottish Cabinet Secretary for Finance and informed Scottish Government’s Advisory Group on Economic Recovery regarding SME focused policy responses to the Covid-19 pandemic. This led to measures including the Pivotal Enterprise Resilience Fund, which has supported Scottish Enterprises in all of Scotland’s Local Authorities through 1,763 grants totalling £1.2 million; and the £20 million Creative, Tourism & Hospitality Enterprises Hardship Fund for small creative, tourism and hospitality companies not in receipt of Covid-19 business rates relief and grant support.
Professor Brown continues to advise the Scottish Cabinet Secretary for Finance on how the Scottish Government can bolster the entrepreneurial ecosystem for high-tech SMEs post-Covid-19. He contributed to a report on Scotland’s high-tech ecosystem which led to the Scottish Government’s Programme for Scotland 2020-2021 commitment to establishing a national network of ‘Tech Scalers’, with between 300 and 500 high-quality new start-ups over five years.