Why is enterprise seen as so important in economic development?

Any discussion on the future of the Welsh economy inevitably results in the generation of much heat but very little light. Perhaps most heat is generated about the much lamented lack of enterprise; we need, the argument goes, to be more “entrepreneurial,” whatever that means. What is invariably missing is why? What is it about enterprise that is seen as so important in economic development?

The evidence on the importance of new firm formation is overwhelming. I use the phrase new firm formation quite deliberately simply because this is ultimately what enterprise (a much abused word) is fundamentally about.

The Bolton Report of 1971 discussed the role of small firms in the economy and although it confused small with new (a definitional confusion that continues) it did have important things to say about new firms. It’s worth noting something that should be obvious – whilst the majority of new firms are small; the majority of small firms are not new.

The report referred to the role of new businesses in

the preservation of dynamism in the economy, which we consider the most important of all benefits…

and

as a breeding ground of new industries and the source of dynamic competition

In a warning that perhaps should have been heeded (and which remains unheeded today, especially amongst those who continue to see inward investment as the way forward), the report was almost prophetic

we fear that an economy totally dominated by large firms could not for long avoid ossification and decay…

and the response that

we can think of no substitute for the dynamic influence of new firms on preventing the ossification of the economy

The importance of new businesses and their role in the wider context of economic development and well-being cannot be over emphasised. A major factor in uneven regional economic performance is low rates of new firm formation and low stocks of regionally based businesses. New businesses provide choice, dynamism, competition, employment, are locally owned and committed to the local area and act as the seedbed function, a vital contribution to the long run health of the economy. High rates of new business creation have been linked to innovation, new product development, new sources of employment and additionally, have been shown to provide a causal link to economic well-being. Research in the USA has shown that high rates of new business creation can add as much as 5 per cent to GDP – a significant statistic given the current state of the Welsh economy.

Much has been written by Michael Porter on the causes and possibilities for locally based economic development – his ideas must be sound since they have been entirely unheeded by the Welsh Government and its policy makers. He points out that economic growth and the businesses that drive it invariably (and obviously) starts within their local area.

paradoxically, the most enduring competitive advantages in a global economy seem to be local

New business formation creates new competitors that feed the process of innovation, a clear determinant of wider economic well-being; domestic rivalry and the demand generated for goods and services by large numbers of individual firms is central to competitiveness and consequent economic growth. However, the activity and sector of the new firms is also important in driving competitiveness and this is of fundamental importance. A priority for the Welsh economy has to be firms with final demand products whether in manufacturing or services.  The products of such firms are often price inelastic, are knowledge based and require product development, design, financial and management skills and, together with the use of technology, drive modern economies. Innovation and entrepreneurship are at the heart of national advantage but as Porter points out, require a favourable environment:

what looks like chance in new business creation is actually a difference in national environments

According to Porter, the proper role of government is to stimulate dynamism and to unleash and amplify the positive forces that drive growth. This presupposes that an appropriate competitive environment already exists and is capable of being amplified and upgraded, which is questionable for the contemporary Welsh economy.  Policy should at the very least, be aimed at laying the foundation for competitive advantage to be created and sustained, which it has to be recognised, takes place over a long period of time. This environment requires a particular form of corporate governance, government commitment and industrial and market structure. This is real challenge for the Welsh Government – creating the right conditions for new firms to start and grow.  This requires a clear objective, sustained commitment, managerial practices and attitudes, together with a national culture that reflects prestige and priority. These form the cultural underpinning of successful economies. There is however a caveat; any new firms policy must recognise that many, if not most, new businesses will not be in high tech or blue skies products, but mundane everyday services and products.

The fundamental problem with the Welsh economy is simply ownership. A tradition of inward investment (which in a sense continues with call centres and large retailers replacing manufacturing) has resulted both in an employee culture and a consequent lack of successful “Welsh” businesses. There are exceptions; Brains Brewery for example and Iceland, but these are exceptions. Whilst not arguing here for the establishment of a Wales Stock Exchange (I and others have presented the idea, again to no response), it is informative as a measure of success in understanding business success in small nations. There are some dozen or so Welsh companies listed on the London Stock Exchange, some of which are not strictly “Welsh” in ownership but established in Wales during earlier periods of inward investment. In comparison, the Maltese Exchange, an island with the size and population of Cardiff lists 23, Tallinn and Reykjavik each list 17 and the Helsinki Exchange in Finland, a country on the fringes of Europe and with a population approximately the same as Wales, list no fewer than 124.

No one is suggesting – including me – that entrepreneurship and the creation of new businesses is the great panacea. There are many problems, levels of education, disposable income and cultural attitude – not least from government, policy makers, academics and the media’s fixation that any investment must come from outside Wales. What I am saying is that perhaps we should start re-building the Welsh economy with a simple assertion; that no successful economy was ever built on external ownership.