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.