In this piece, RBS Chief Economist Stephen Boyle looks at what impact market conditions in Scotland have on enterprise.
16 Feb 2016
It is a sign of old age that I have friends and former colleagues who worked with the Scottish Development Agency in the 1970s encouraging and supporting people to start businesses. In the 1990s, I had the good fortune to work with the peerless Sir Donald MacKay as he led the Business Birth Rate Inquiry, which sought to establish why the pace of business creation in Scotland had been so low. More recently, the enterprise networks, councils and others have promoted the start-up cause through Business Gateway.
It has not been for a want of analysis, effort or hard cash that Scotland’s business creation rate continues to lag the UK average. For every 10,000 adults in England there are almost 1,100 businesses while in Scotland there are fewer than 800. Across England, new starts were equivalent to 15 per cent of existing businesses in 2014 but only 13 per cent in Scotland.
These gaps matter not because there is a contest to have the highest numbers. They matter because they hold back economic growth in Scotland, meaning our living standards could be higher if the gaps could be bridged.
The reason is that competition and the threat of it are Darwinian spurs to productivity growth. Firms that face competition have to try harder, eking out efficiency gains and innovating to stay in the game. Those that fail the test go out of business. Our smaller business base and the lower rate of market entry mean firms in Scotland are likely to face less pressure from incumbents and new players than those in the rest of the UK. The business death rate in Scotland is also lower than the UK average, which could signal that competitive intensity is relatively weak. In addition, the fact that compared with England the public sector accounts for a slightly higher proportion of economic activity in Scotland and that fewer public services here are contestable likely contribute to weaker competition.
None of this is new. We have tried for decades to accelerate the business start-up rate. Yet the gaps remain. The newest kid on the block to tackle this challenge is Entrepreneurial Spark. Born in Glasgow, it is the world’s largest free business accelerator for start-up and growing businesses. Its “chiclets” – the new business – are housed in “hatcheries” where they are mentored by experienced business people and have access to wifi, IT equipment and workspace. Perhaps most importantly, the chiclets are hot-housed with like-minded entrepreneurs.
These remain early days. The Glasgow hatchery opened three years ago, followed by one in Ayrshire and then the Edinburgh hatchery, which moves to a custom-built facility in the RBS campus at Gogarburn on Friday. Yet Entrepreneurial Spark-assisted firms have already made sales of tens of millions of pounds, secured massive amounts of investment and created many jobs for the Scottish economy. Their annual report will be published on Friday and all the rumours point to a major success story.
We will know in a few years how much the initiative is helping to address this enduring economic Achilles heel. What is certain is that if the commitment and enthusiasm of the businesses that have so far passed through the hatcheries is a guide, success would be guaranteed.
This article first appeared in The Times on Thursday 11 February 2016