2. A CULTURE OF ENTERPRISE AND MORE BUSINESSES OF SCALE
The ability to spot new business opportunities and the drive to act on these opportunities describe the process of entrepreneurship. This process propels both the establishment of new businesses and above average growth in established businesses, in turn contributing to higher levels of competition, productivity, employment and output. Four measures serve as a proxy to capture changes in entrepreneurial levels in Scotland.
- Number of business starts per 10,000 of the adult population
- Global Entrepreneurship Monitor - Total Early Stage Entrepreneurial Activity Index
- Number of high growth business starts
- Number of businesses of scale
Entrepreneurial activity and business starts
The most robust indicator of new entrepreneurial activity in Scotland is the number of new businesses registered for VAT purposes, although this misses out the smallest businesses not large enough to be registered for VAT.
- In 2005 there were 28 VAT registrations per 10,000 adult population, similar to the level in 1999. This puts Scotland at the top of the fourth quartile of UK regions.
- The gap with the UK average has narrowed slightly since 1999 from 9.6 to 8.9 VAT registrations per 10,000 adults, due to a small decline in the UK figure.
- To close the gap with the UK average would require an increase of 34 per cent or another 3,900 VAT registrations per year; to reach the top quartile would require an increase of 45 per cent, an additional 5,100 registrations.
Chart 5: VAT registrations per 10,000 adults, 1999 and 2005. The gap with the UK has narrowed slightly but remains significant.
Source: SBS and DTI.
The Global Entrepreneurship Monitor's ( GEM) Total Early-Stage Entrepreneurial Activity ( TEA) Index allows international comparisons of early stage entrepreneurial activity. The TEA index identifies the proportion of working age adults who are either setting up or have been running a business for less than 42 months. It therefore provides a fairly broad measure of early stage entrepreneurial activity.
- In 2005 TEA in Scotland stood at 5.8 per cent compared with 6.9 per cent at the UK level putting Scotland the second quartile of 21 comparator countries.
- Scotland's position benchmarked against comparator economies has improved significantly between 2000 and 2005. Scotland was at the bottom of a league of 15 countries in 2000 with 4.0 per cent.
- To reach the top quartile Scotland's TEA index would have to rise from 5.8 to 9.4 per cent.
Number of businesses of scale
Scotland lacks a critical mass of larger businesses and a key challenge is growing and sustaining businesses of scale (defined as businesses with a turnover of £100 million and above and for financial intermediation enterprises more than 900 employees 4).
- In 2005 Scotland had 115 businesses of scale accounting for 0.10 per cent of the total business stock. This is a marginally lower proportion than the UK average of 0.13 per cent of the business stock.
- Between 1999 and 2005 the number of businesses of scale in Scotland increased from 110 to 115 but the proportion of the total business stock remained unchanged at 0.10 per cent.
- Scotland was in the third quartile of UK regions in 2005. In order to reach the top quartile, Scotland would need an additional 55 businesses of scale.
Chart 6: Number of businesses of scale as a proportion of total business stock, 1999 and 2005. Scotland lacks a critical mass of companies of scale.
Source: ONS, IDBR.
High growth business starts
A Smart, Successful Scotland gives a focus to rapidly growing new businesses which, were they to achieve their potential, could be the key drivers of future growth in Scotland. The latest data for Scotland show that:
- 0.5 per cent of all new VAT registrations (50 businesses) with less than five employees had grown to employ more than fifteen staff between 1999 and 2002.
- The proportion of high growth businesses increased between 2001 and 2004, when 0.7 per cent of new starts (55 businesses) grew to employ more than 15 people.
Summary Position
Despite some modest progress, Scotland's performance on entrepreneurship and businesses of scale growth lags behind its competitors. The number of new business starts has increased but Scotland is still well below the UK average and is ranked third bottom amongst UK regions. The number of businesses of scale located in Scotland has increased in absolute terms since 1999 but not relative to the total business stock. The proportion of new businesses reaching a modest scale over a three year period has grown slightly since 1999 but remains small. More encouragingly, the GEM's broad based measure of early stage entrepreneurial activity indicates Scotland has narrowed the gap with the UK and climbed the ranking of international comparators to the second quartile
Therefore, although some progress has been made, raising Scotland's entrepreneurial and business growth performance to the desired levels remains a key challenge for the Scottish economy.