AN ECONOMIC STRATEGY FOR RURAL WALES


Earlier this week, the Labour AM Eluned Morgan asked the Welsh Government to develop a dedicated plan for the rural economy in Wales given the high degree of uncertainty going forward following the Brexit vote.

I couldn’t agree more but rural Wales, even prior to last June’s vote to leave the European Union, has faced many challenges over the last two decades including depopulation by young people, a decline in household incomes, the increased price of housing (especially for first time buyers), a decline in public services and transport, and the closure of rural schools.

In addition, rural businesses have had to face very different problems as compared to their counterparts in urban areas such as Cardiff, Wrexham, Newport, Swansea and the South Wales Valleys.

For example, one of the key competitive disadvantages faced by many rural businesses is that of small local markets, combined with the distance from major national and international markets.

This emphasises the importance of appropriate business support assistance to help with market development, exporting and marketing, a problem that is exacerbated by the fact that traditional financial and business support is typically weaker in rural areas.

In particular, commercial providers of business services - such as accountants or law firms  - tend be thinner on the ground and have less extensive expertise in key areas.

Lower business densities in rural areas also make it more expensive to deliver business and training support than to comparable urban-based firms, which means that it is important for rural firms to access the right type of advice from the business network.

This ‘rural premium’ can also make it very expensive for firms to participate in training sessions, business meetings and network events.

Of course, this market remoteness is not always a weakness and can also be turned to the advantage of the local economy. This is because many rural businesses will reach the capacity of the local market at an earlier stage than urban firms, and may have to adopt a more proactive approach in seeking our new market opportunities than those businesses based within densely populated areas.

This creates more specific challenges to entrepreneurial rural businesses as they will need to adopt a highly pro-active marketing method in order to extend their geographical markets. This can result in specific management problems for young rural firms as they require specialist knowledge and expertise which is often lacking in the business itself.

Another key issue for many rural businesses wishing to expand and grow their activities is the absence of suitable premises and an adequate pool of skilled labour.

Whereas urban areas are generally characterised by a wide range of different types of business property, this is invariably not the case in rural areas. Whilst there are certain advantages in having space availability at low cost in rural areas, there are also significant constraints affecting growing businesses resulting from the shortage of larger premises.

In many cases, the scarcity of larger premises in these localities is attributed to strict planning policies. This issue needs to be addressed sensitively but practically by local authorities as there is a clear need for a variety of sizes and types of business property in rural areas if the space requirements of businesses at different stages of development are to be met and if growing businesses are going to be retained within the rural economy.

The small size and occupational composition of rural labour markets can also impose a constraint on growing small firms, making it necessary to attract recruits from more distant locations.

Lower pay levels and a reliance on informal recruitment practices can make this difficult to achieve.

As a result, rural firms attempt to retain labour, with a willingness to train as a means of obtaining the required skills, although locational factors and their distance from centres of population means that many rural firms are disadvantaged in terms of access to suitable training opportunities which are based within towns and cities.

Finally, rural firms must take advantage of the potential offered by new technologies to improve links with customers and suppliers, and reduce the comparative disadvantage of remoteness. But whilst broadband is allegedly being made increasingly available across the whole of Wales, it still seems likely that many parts of rural Wales will be amongst the last areas to receive access because of the relatively low and dispersed nature of the demand.

Therefore, Baroness Morgan is right to highlight the issues facing the rural economy in Wales and it is clear that any economic support to businesses in rural Wales needs to take account of the distinctive environment in which firms operate such as the relatively small size of the local market, the limited opportunities to trade and network with other local businesses, and the small size and restricted skill base of the local labour market.

However, if the Welsh Government can begin to appreciate the unique economic nature of rural
Wales and develop a strategy that can address their particular weaknesses, then the entrepreneurial potential of many rural businesses can be realised and they can make a real difference to the wealth and employment of this very special part of the Welsh economy.

WHO IS THE ENTREPRENEUR?

I was recently an external examiner on a Ph.D which examined graduate entrepreneurship and how young people perceived starting a business here in Wales.

A central theme was the challenge of the age old question of “who is the entrepreneur?”, which has been asked by economists, sociologists, psychologists, anthropologists and even the odd business academic for nearly three hundred years.

Whilst many think the term entrepreneur derives from the French, that fact is only half true. Indeed, it was Richard Cantillon – an Irish economist of French descent – who first coined the term in 1730 to describe someone who organizes and assumes the risk of a business in return for the profits.

Unfortunately, his ground breaking work recognising the important influence of this individual was largely forgotten over the next two centuries and a half as large corporations came to dominate economic and business thinking across the World.

In fact, the UK Parliament became so concerned about the diminishing impact of the small firm sector that it commissioned a seminal report in 1971, by John Bolton, which looked to understand those challenges restricting the role of entrepreneurial firms and develop policies to

A few years later, economists such as David Birch in the USA began to show that, contrary to popular thinking at the time, small firms were significant job creators in the economy.

Since then, various studies have shown that new businesses established by entrepreneurial individuals are major contributors to employment. For example, the Kauffman Foundation has shown time and time again that almost all new net job growth in the American economy has been created by firms less than five years old.

They also stimulate innovation, establish new markets and act as a competitive spur for existing businesses to increase their productivity.

In fact, the social media revolution – which has transformed the way we communicate and live our lives over the last decade – was not created by established multinationals but by young hungry entrepreneurial firms such as Facebook, Twitter, Paypal, Linkedin, AirBNB to name but a few?

And the growing interest in entrepreneurship is showing no signs of slowing down.

Earlier this month, the Centre for Entrepreneurship showed that business formation rates in the UK had reached another record high with a total of 657,790 new businesses started last year. That equates to an incredible 1800 new businesses being created every day in 2016.

More importantly, an increasing number of these new businesses are being established by young people who are educated, are without families or mortgages to tie them down and are not wedded to a career. Most importantly of all, they have a strong entrepreneurial spirit and display incredible drive and enthusiasm.

That is why it is important that universities play an increasing important part in supporting enterprise and developing more entrepreneurial students who could create the growth businesses of the future.

In 2008, a seminal report entitled “Developing Entrepreneurial Graduates” was published by NESTA and the National Council for Graduate Entrepreneurship.

In the foreword to this excellent work, Lord Karan Bilimoria – the founder of Cobra Beer – said that the UK’s competitiveness hinged on its ability to create business-ready graduates with entrepreneurial skills.

Yet, how many higher education institutions here in Wales can truly say that their students, whether they are studying engineering, nursing, accountancy or fine art, will leave with an experience of enterprise that will change the way they think about the World?

How many can make the claim that they will have helped to develop an enterprising and innovative graduate who will make a real difference to an organisation, whether it is one they work for as an employee or one they set up themselves?

We know the growing importance of entrepreneurship to an economy but Wales is, unfortunately, lagging behind the rest of the UK when it comes to new business creation. For example, whilst 93 new businesses were created for every ten thousand people in the UK in 2015, in Wales, only 60 businesses were established.

Given this, it is time our higher education institutions stepped up and provided not only the academic knowledge to our students but also new opportunities to develop entrepreneurial mindsets, behaviours and skills.

Indeed, as the 2008 report stated, these abilities that will help their own futures but will also make a significant contribution to the UK’s economy and to its global standing.

And with the world becoming a more uncertain place during the last twelve months and significant challenges on the way, this should be a priority for the Welsh economy over the next few years.

UK PRODUCTIVITY AND MANAGEMENT SKILLS



One of the real mysteries regarding the current state of UK’s economy is the so-called productivity puzzle. which refers to the fact that labour productivity has stagnated since the economic downturn of 2008.

This is very different to what has happened after previous recessions where productivity initially fell but then recovered and returned to previous levels.

Whilst there has been considerable economic debate surrounding the causes of lower productivity and some attempts by politicians to address this issue, there has been little progress to date to explain what has been going on.

That is why a recent paper which examines the link between management practices and productivity within UK manufacturing businesses makes fascinating reading.

Those of us who have been working for many years within the academic discipline of business and management appreciate the growing evidence between the adoption of management practices and increased performance in terms of growth, profitability and, most important of all, productivity.

Yet most of this research has tended to be ignored by policymakers and therefore this latest study, which attempts to examine this phenomenon in the context of differences in productivity performance, is to welcomed.

By using existing international work on these areas, structured management practices are carefully defined as a number of important processes including continuous improvement, number and monitoring of key performance indicators (KPIs), timetables for targets and how these targets are stretched, employee promotion and underperformance and finally, hiring decision-making.

So what does this research from the Office for National Statistics tell us about productivity amongst UK enterprises?

The first critical finding is that the study estimates that an increase in the management score of 0.1 is (on a scale of 0-1) is associated with an increase in labour productivity of 8.6 per cent. Simply put, an increased focus on management practices makes the business more efficient and effective in terms of productivity.

Of course, as management becomes more formalized as the company grows, it is not surprising that scores for management practices increase with the size of the firm i.e. the more people a company employs, the higher the management practice scores.

Given the link with productivity, the data shows that the average annual output per worker increases from around £40,000 for small businesses (10 to 49 employment) to £53,000 for medium-sized businesses (50 to 99 employment) and £62,000 for large businesses (employment of 250 and over).

The study also looks at the type of businesses that are productive and shows that
multinationals, large businesses (employment of 250 and over) and non-family-owned businesses have higher management scores and are more productive than domestic, smaller and family-owned businesses.

Of course, this study has focused on only one influence on productivity and there needs to be more research that into other sectors and, more importantly, on the influence of other factors on business performance such as innovation, skills and capital.

Nevertheless, given the lack of focus by policymakers on supporting the development of management skills within small firms, there is a clear message here that there needs to be a greater priority given to this vital area if the issue of falling productivity is to be addressed.

This is a particular issue for Wales as the latest regional productivity data shows that it has the worst performance of part of the UK at 80.1 of the average productivity for the economy.  In terms of city regions, only Sheffield does worse than Cardiff across the UK.

Despite this, the issue of productivity and how to improve it doesn’t seem to be on the current economic agenda of the Welsh Government, although it does have the opportunity to address this urgently when a new industrial strategy is drawn up later this year.

However, this is not only an issue for politicians alone and as this column has reiterated on several occasions, there is a real need for universities and business schools to not only focus on supporting traditional students but also to ensure that the latest management practices are adopted by a small firm community which currently seems reluctant to do so.

If that could be done (and done properly) then the impact on the Welsh economy and its future prosperity could be more significant, in terms of productivity, than anything else over the next decade.

STARTUP PERFORMANCE IN WALES

One of the key economic indicators regarding growth of an entrepreneurial economy is the number of new businesses being born every year.

As various academic research studies have shown, young firms create the majority of jobs in an economy and, simply put, employment will rise with an increase in the number of start-ups.
For example, a study from the Kauffman Foundation in the USA showed that new businesses account for nearly all net new job creation. Indeed, companies less than one year old have created an average of 1.5 million American jobs per year over the past three decades.

That is why the most recent data published by the Office for National Statistics (ONS) on business births in the UK is to be welcomed as it shows that a total of 1.85 million new firms have been established during the period 2010-15.

Of course, there have also been 1.47 million businesses that have closed down over the same period but the overall growth in the stock of firms means that net effect on the economy (and employment) has been positive for the last five years.

In fact, the situation has been improving year on year and the 383,000 business births in 2015 were the highest recorded since comparable records began in 2000, equivalent to a business birth rate (i.e. new firms as a proportion of active businesses) of 14.3 per cent.

This increase in the number of total business births is probably reflected in the strengthening of the labour market from an employment rate of 70.5 per cent in December 2010 to 74 per cent at the end of 2015.

In addition, the rate of business deaths has fallen to 9.4 per cent, the lowest level since 2006 with firms surviving longer as a result. Indeed, the data shows that four out of ten businesses born in 2010 are still active in 2015, which is a major improvement on the position during the last decade.

In terms of regional differences, London had the highest business birth rate (18.6 per cent) and Northern Ireland the lowest (9.7 per cent). Interestingly, this also seems to be reflected in the growth in the relative prosperity of both regions since 2010 as discussed in last week’s column.

If we examine new business formation by industry, the highest rate of business births in 2015 was business administration and support (20.4 per cent), which probably reflects the ease by which a business can be established in this sector but also the growing demand for such services within the wider economy.

It is also worth noting that in terms of absolute growth in the number of business births between 2010-15, a total of 160,000 business administration and support firms were created. This was followed by management consultancy (154,485), retail (142,265), specialised construction (138,735) and computer programming/consultancy (130,490).

This is not surprising as there has been evidence of an increase in new businesses being established in niche areas by professionals with support structures, such as co-working spaces, being created to encourage such growth.

In terms of the percentage increase in the number of new firms, the surprising growth sector over this period was “electricity, gas, steam and air conditioning supply” which went from 220 new firms in 2010 to 3,220 in 2015 (an increase of 1364 per cent). This probably reflects the increase in smaller scale generation around the UK over the last few years and is good news for the further development of this market, especially in terms of local environmentally friendly energy schemes.

In Wales, the business birth rate was slightly lower than the UK at 12.1 per cent in 2015. The overall number of new businesses had increased by 58,190 since 2010 with a total of 51,970 firms closing over the same period.

In terms of percentage growth since 2010, the annual number of new businesses created in the Welsh economy has grown by 54 per cent. This is lower than the UK average (63 per cent) over this period but considerably higher than either Scotland or Northern Ireland.

Not surprisingly perhaps, Cardiff has created the largest number of new firms (8,645) since 2010, accounting for 15 per cent of the Welsh total. However, the highest growth rate over the six-year period has been experienced in Merthyr Tydfil and Blaenau Gwent, suggesting that entrepreneurship may be finally beginning to flourish in our poorest communities where it is most needed.

Therefore, the good news for the UK economy is the statistics suggest that an enterprise revolution over the last few years is having a positive effect on jobs and prosperity and whilst Wales is doing relatively well as compared to other regions, there is remains scope for improvement over the next few years in ensuring that entrepreneurial activity develops further.