Why is enterprise seen as so important in economic development?

Dr John Ball explores what it is about enterprise that is 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.

Dr John Ball is a former lecturer in economics at Swansea University and an expert on regional policy.

10 thoughts on “Why is enterprise seen as so important in economic development?

  1. The basic thesis of this article is absolutely right: a lot of things become possible in Wales if we could establish a true enterprise culture. Indeed, if anything, the article understates the potential benefits. We might not only increase prosperity but improve our public sector as the tax base widens and an enterprising mindset leaks from the private sector to the public.

    It is not just about establishing new businesses but growing existing ones. Indeed the latter may offer the greatest potential for increasing GDP and employment.

    It can be done. The Welsh people have many entrepreneurial traits – but they tend to exhibit them best outside Wales. Why is this? To build an enterprise culture in Wales we need to overcome five specifically Welsh obstacles: a generally pessimistic outlook and consequent lack of initiative; hostile socio-political attitudes to business; an education training system not fit for purpose; bureaucracy and overregulation; and poor access to early stage financing.

    All these could be overcome, some of them quite quickly and easily, but the frustrating thing is that in recent years public policy has been taking us in the opposite direction.

  2. Dr Ball, as ever, is spot on in his analysis. Cardiff Bay’s – i.e. the Labour Party’s – obsession with ‘money from beyond’ is frightening. I spoke with a group of sixth-form students a few years back who had some fantastic ideas for creating businesses, and employing skilled, local people. When I asked if they thought they could achieve their ambitions, one replied “yes, but it would have to be outside Wales”. The rest then nodded in agreement. That episode brought home to me the fact that we have massive cultural and psychological barriers to overcome if we wish to keep our brightest and best young people, and to truly nurture their creative, economic talents.

  3. I see enterprise every day when I work in various parts of Wales I also see potential entrepreuers – but they are not the ones usually targeted or supported by the powers that be an dtheir usual advisors

  4. contd – that went too quickly.
    Often the enterprise is on estates like the Gurnos or Penrhys where no business development or business advisors ave ever put a foot .The initiatives range from small lifestyle business that can be expanded, good business ideas that need support to develop and yes some possible social enterprises
    Not all business startup come from the same middle class roots and where are the business development people these days ?
    We need some money invested in non traditional areas and we can only benefit from wider input

  5. Agree with the analysis, conclusion and sentiment, but don’t see anything beyond an exhortation. What practical steps could be taken?

  6. Difficult to disagree with the comments but there are a couple ideas that help explain the problems Wales suffer from:
    Politicians are under pressure for instant results hence the establishment of the WDA way back and the way current politicians are criticised if Wales fails to receive its fair share of inward investment. So it is no surprise that is where they expend their energies.
    Consumers whether individuals or business show little loyalty to the local area or Wales as a whole. Three simple examples – supermarkets note the huge number who buy Anchor butter in preference to Welsh brands where the recycling of money within the Welsh economy would be a decent multiplier – shoppers who especially in the north of Wales prefer to shop outside the local area, usually Chester, for even basic items – businesses who use accountants outside of Wales even when the big chains have a branch in Cardiff or other cities.

    A change of mindset is needed but not just by policy drivers, we need a campaign to persuade that Welsh products or ideas are not second rate.

  7. Nice piece, Completely agree with the fundamental argument John. There is however a missing element: there must be sufficient local demand for the starting of a business to be worthwhile (whilst it would be nice to have legions of entrepreneurs inventing globally exportable, innovative products, it’s probably too large an ask). The problems of weak local demand and weak supply side (for indigenous companies at least) are inextricably interlinked. I suspect there is a win-win here if consumption structures and attitudes can be changed to retain a higher percentage of money locally (or with locally owned businesses), but this kind of intervention is wholly outside the trite region-competitive model and hence not up for debate – at least at regional level and outside of the worthy but trivial ‘support your local high street’ days and messaging.

  8. As an analysis, this article hits all the right buttons and says all the right things. Very good.
    I have started several businesses in Wales over the years some of which got nowhere and two which sustain my livelihood today (just about!). If I have learned anything, it is that it is (only) DEMAND that drives business success – not ‘enterprise’, ‘entrepreneurial spirit’ (duh?) or government support agencies.
    If there is a proven demand for the product or service your business offers then there is cashflow and problems with banks and suppliers tend to disappear. It also helps if you are able to tell people what you make/supply/do (sometimes called marketing).
    This is not to say that the business climate in Wales is conducive to small business it patently is not and like everyone else in business my relationship with banks, the vast overwhelming public sector, and politicians is fraught with fear and loathing.

  9. The thing that every new business needs is a support network of people who are able and willing to say – “great idea, love the enthusiasm”, ” we can help you and we’ll go the extra mile to do so”, “we can open doors and we will”, “we can positively challenge your ideas , without destroying your will to succeed and give you that extra bunk up the ladder to get you going”.

    We need individuals who are able to say things like “Don’t worry about the traps and pitfalls that come from taking too much advice from banks, accountants and solicitors – we can put you in touch with the best people on that side of things and steer you around all the c.ap that comes with all of that sort of stuff and we can help you to navigate the right path”

    We need people who can and will offer to say – “I’m in New York next week and then off to Changdu – I’ll drop in a word and pop in to see a few people who might have an interest”

    What we have had over the years are plenty of advisors and consultants who critically analyse to the nth degree and offer no real positives to drive things forward. We have people who are knowledgeable and experienced, but who try to assert their knowledge and advice on enthusiastic and perhaps naive individuals simply to make themselves feel more knowledgeable and important. Too many of our advisors think of themselves as teachers, rather than being supporters. We need knowledgeable, and motivational critical supporters who do real things of benefit to business, In my mind that is what is missing in terms of the non financial side of our business culture. We need a multitude of detached, motivational critical friends with the knowledge and the networks, together with the drive and passion to assist. This is a lot more than simple mentoring or advice – the tangible extras that we need are the things you get by default in a dynamic, confident and supportive business culture.

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