A One Nation Approach to Small Businesses

17^th May 2013

SME support networks are the key to prosperity, argues ResPublica's David Fagleman

With the publication of Lord Young’s report the government has reminded us that it still holds Small Medium Enterprise (SME) growth central to the economic recovery. But by taking a One Nation approach and encouraging the creation of supply chains, small businesses would be able to grow, develop and compete together.

In his second report, the Prime Minister’s Enterprise Advisor has focused on what measures the government can take to help small businesses develop their confidence and their capacity to grow. Small businesses play a large role in the UK’s economy employing 7.8 million (32%) of private sector workers, generating 20% of the private sector’s turnover and making up 95% of all UK business. They have a key role in our economic future and Lord Young is quite right to focus attention on their development.

The report makes some much welcomed recommendations that could help SMEs grow and develop. By removing the age-cap to qualify for a Start-Up Loans (currently set at 30 years old), finance and support will be available for all entrepreneurs encouraging new business. Making it simpler for SMEs to compete for public sector contracts in their local area will allow them access to the £230 billion a year that is spent on goods and services across the public sector. There are also recommendations to help encourage small businesses to get external specialist advice in areas of financial management and growth by introducing a £30 million Growth Voucher. The report also has recommendations for allowing business schools to increase the flow of graduates into SMEs.

These recommendations must be welcomed and the government is to be commended for recognising the contribution SMEs make to society. However, the approach to SME growth often adopted overseas differs from that proposed by Lord Young. The model commonly adopted by our competitors encourages small businesses to work co-operatively, rather than go it alone.

The idea behind this is that SMEs will have a better chance of prospering if they form network partnerships that focus on collaboration rather than all-out competition. By creating these networks, SMEs can establish integrated supply chains that can quickly recognise, source and support new market opportunities. This enables small firms to synchronize and benefit from lower transaction costs, higher efficiencies and greater knowledge transfer. By working together, SME can also be more resilient to economic crises and hostile business conditions.

Where such SME networks have formed, small businesses have flourished. Take the region of Lombard Italy for example. It is one of Europe’s leading economic regions and accounts for over 20% of Italy’s GDP. Much of its success is owed to an integrated supply chain of SMEs. The Italian model of co-operation has become an exemplar of how small firms can survive in increasingly competitive global economies. Italian firms have even developed intra-lending strategies between small businesses to help aid investment and innovation.

In Catalonia, marked by the EU as the European Entrepreneurial Region 2012, SME networks support bigger business as the customers and have created an image and business profile just as important as the final retailer. In Sweden, partnerships and co-operation between small businesses are encouraged by the national authority for SMEs in order to increase regional and international competitiveness. Over in Turkey, the domination of supply networks has meant that businesses working in partnership have fared better even in times of recession than independent businesses, in terms of sales, employment and strategy.
Asian small businesses are also benefiting from supply networks. In Japan, the “Flying Geese” model of small firms, which enable supply networks to go beyond national borders and connect with their international counterparts, has inspired numerous other Asian countries to directly link their SME chains to export and growth. In China, small businesses are co-operating to increase their chances in winning lucrative public procurement contracts.

In today’s economy, it is important for smaller firms to recognise that if they are to acquire any market share, especially in relatively developed markets, then it is often supply chains of smaller companies, not individual firms that can successfully compete. Integrating product or service supply chains have greatly increased the success of small businesses elsewhere in the world and its absence in the UK is perhaps one of the reasons why we have failed to take our SME’s where our international competitors have.

British small business needs a supply chain model to compete and survive in the current market. The government should take note of its success abroad and take steps to encourage its formation here. The current reforms offer advice, encouragement and less red-tape but there is an opportunity being missed.
Introducing supply chains can not only provide economic growth, it can create a supply of capital to labour which enables ordinary people to innovate and educate together, investing in their own business and their own lives. Recommendations for small business growth should take this one nation approach and encourage partnerships between small businesses to enhance their innovation, pool their resources and work under a relationship of networked co-operation.