Innovation And Growth

THE SUFFOLK SMALL BUSINESS PROJECT

Is innovation the key to small business growth?

It is often said that innovation is the key to small business growth. The objective of this paper is to examine why that might be the case by examining some of the models which place innovation at the core of the growth process, to consider the evidence to support these models, and to then examine how the models and the evidence might relate to the experience in Suffolk.

The key linkage is very simple and very compelling. It is held that entrepreneurship, the fount of small business activity, gives rise to innovation, and that innovation, in turn, gives rise to corporate - thus economic - growth. There are three parts to the model - entrepreneurship, innovation, and growth - which are linked together by two key relationships - that entrepreneurship fosters innovation, and that innovation fosters growth. We shall consider in turn each of the three part to the model and how they might be linked together.

The key determinants of entrepreneurship are said to be a predisposition to innovation, a pro-active stance, and an openness to accepting risk. In turn, the predisposition to innovation is determined by an openness to new ideas, the leveraging of creativity, and a willingness to experiment. In a survey of small business, the Centre for Business Research at the University of Cambridge found that 75% of innovative businesses had engaged in R&D activity in the previous year, 81% had innovated a product or a process in the previous year, and 40% of the respondents had more than 25% of their workforce educated to at least first degree level. To this extent, it would appear that there is a link between entrepreneurship and innovation.

However, before looking at the business impact of innovation, it is worth considering the process of innovation. There are three key seeds to innovation:

1. Creative thinking - which includes a belief in creativity, being curious about our environment, and discovering new ways of doing things.

2. Strategic thinking - to see the big picture, to project it into the future, and to do the extraordinary in the present in order to reach into the future.

3. Transformational thinking - to be able to implement the vision of the future in a process of change management.

Together, these three seeds of innovation grow to nurture the process of innovation within the business.

The need for a programme of constant innovation is driven by two factors. First, the current pace of technological change is such that it is difficult to stand still. Change is occurring so fast that business models and organisational designs can become outdated very quickly now. Secondly, in an expanding world, the threat of competition is greater now than it has been in the past. There is a greater degree of transparency to commercial transactions, there is the constant threat of the out-sourced off-shore competitor, and there is the ever danger of technological redundancy. The expanding world has created a large number of opportunities, but it has also created a large number of threats as well. In this version of the business world, if you are not growing, you are falling behind to the competition. This describes the link between the innovation process and business growth.

The threat of the expanded world, along with the rapidly changing business model, have highlighted the need for a pro-active stance to the world, along with a predisposition to innovation, as important features of entrepreneurship. The evidence Centre for Business Research at the University of Cambridge supports this view. The research found that, whereas innovativeness was weakly associated with employment growth, it was positively associated with turnover growth in small companies. Furthermore, the evidence also suggests that low levels of innovativeness are associated with stagnating turnover growth.

In this way, invention and innovation are critical to the long-term competitiveness of the British economy. Conventional economic theory holds that the key to economic growth is the growth in productivity. The key driver of overall productivity growth is innovation within existing firms. This is not to say that start-ups cannot make a contribution to overall productivity growth, but the evidence does suggest that an emphasis on the providers of technology underplays the importance of the users of technology in generating productivity gains. In turn, this means that increasing the number of start-up companies, even if they are spun out of larger concerns, will not necessarily enhance economic performance.

Instead, of far more importance empirically, it is how technology is used to generate productivity gains that determines productivity growth. The research indicates that organisational and management innovation (i.e. organizing things differently) have made as much a contribution to productivity growth as the adoption of new technologies. This would imply that an investment in both technology and human capital is needed to drive productivity growth.

Here we have the complete model. Entrepreneurship, through a predisposition to innovation, drives the innovation process. The innovation process, through productivity gains, drives small business growth. The evidence suggests that this is a robust model of economic performance. However, the question remains of how well this model has performed in relation to the Suffolk small business community.

The evidence of the Global Entrepreneurship Monitor of the London Business School suggests that the East of England has the lowest rates of entrepreneurship in the UK, and that, in recent years, the levels of Total Entrepreneurial Activity have been falling, whilst those in the rest of the UK have been rising. This is quite a disturbing result for those concerned with the development of the small business community, and it is an area that we decided to examine further in our survey of small business.

In our survey, we found that 14.5% of small businesses didn’t actually work in the county. Furthermore, in response to the question: What is great about doing business in Suffolk? 45.4% stated that it was a nice place in which to do business and 28.1% stated that they liked the people who they dealt with in Suffolk. These responses are more in the nature of lifestyle responses rather responses that state a core business advantage. Indeed, when asked to provide a description of the Suffolk small business community, 21.8% provided a negative response.

This evidence rather tended to support our view that many small businesses see Suffolk as a great place to live, but not a very good place in which to do business. We can speculate why that might be so, but we would point to the lack of a Creative Class in the county as providing a lead to the business community and we would point to an inward looking and risk averse population as explanations as to why there really isn’t an entrepreneurial class in Suffolk. If there are few entrepreneurs, then it is hardly surprising that there is little evidence of entrepreneurial activity in the county.

If Suffolk is to develop a thriving and indigenous small business sector, the evidence suggests that it will have to develop an entrepreneurial class from which this growth will come. The entrepreneurs are likely to arise from a Creative Class, if that becomes established in Suffolk. This may happen owing to the relocation of entrepreneurs from the London metropolitan area. The key uncertainty is the degree to which this might happen to create a critical mass in the local economy.

Monchers™ is a Trademark of The Greenways Partnership Limited, a company incorporated in England, Reg Number 2825001. Registered office; 6 Greenways Close, Ipswich, Suffolk IP1 3RB, United Kingdom. UK Data Protection Registration Number Z7277556.