Page 1

SOLE TRADER (0)

LIFE SCIENCES SECTOR BASED APPROACH MICRO (0-9)

ECONOMIC PRESSURE

TOURISM ADVANCED MATERIALS AND MANUFACTURING DIFFERING NEEDS

ENERGY AND ENVIRONMENT SMALL (10-49)

SME WELSH ECONOMY ICT

SUPPORT

MEDIUM (50-249)

FOOD

SMALL BUSINESSES IN PRIORITY SECTORS FEDERATION OF SMALL BUSINESSES, WALES

ECONOMIC RENEWAL PLAN (ERP)

FINANCIAL AND PROFESSIONAL SERVICES E-COMMERCE

LARGE (250+)

CREATIVE INDUSTRIES

CONSTRUCTION


2

SMALL BUSINESSES IN PRIORITY SECTORS

TABLE OF CONTENTS 3

EXECUTIVE SUMMARY

4

INTRODUCTION TO THE ECONOMIC RENEWAL PROGRAMME (ERP) IN WALES

5

A SECTORAL APPROACH TO ECONOMIC DEVELOPMENT

6

SMALL FIRMS IN WALES

9

OUTLINE OF METHOD

9

SURVEY RESPONDENT CHARACTERISTICS

12

TRADE PATTERNS

13

BUSINESS PERFORMANCE

16

METHODS OF FINANCING

17

CHALLENGES FACING BUSINESS

19

CONCLUSIONS: ERP AND SMALL FIRMS


CARDIFF BUSINESS SCHOOL AND FEDERATION OF SMALL BUSINESSES, WALES

1. EXECUTIVE SUMMARY 1.1 The Welsh Economy has grown slowly in recent years. Continuing global economic pressures have meant that the competitiveness of Welsh firms has been below that of other regions of Europe. In 2010 the Welsh Government published the Economic Renewal Plan (ERP). This set out a plan to develop the conditions and frameworks to enable the private sector to grow. One of the primary differences between this plan and previous was the targeted nature of all support. A sector based approach was highlighted whereby business support polices are constructed based on the needs of individual sectors.

1.2 The industrial structure of Wales is a critical context when it comes to implementing the ERP. Large anchor companies could be made the primary focus of sectoral policy. However, while large firms dominate Welsh employment, sole traders, micro and small firms vastly outnumber them. We expect the needs of small firms to be different from larger ones such that caution is required if policy takes a “one size fits all� approach.

1.3 This report finds differences in business needs by sector and size. Then a finer graining of policies could be important for industrial development policy. This report finds that SMEs in different sectors have very different needs. Issues emerging around finance as well as business support would suggest there are issues which are unique to the SME group of firms. We argue that a sector approach needs to be balanced with an understanding of how intra-sectoral needs vary by firm size. The ERP if used as the road map for future development needs to have a greater emphasis on SMEs. There needs to be a greater support for non financial issues such as trading abroad and improving e-commerce.

3


4

SMALL BUSINESSES IN PRIORITY SECTORS

2. I NTRODUCTION TO THE ECONOMIC RENEWAL PROGRAMME (ERP) IN WALES 2.1 T his report has the following objectives. First, to examine the rationale for a regional economic policy that focuses on the prioritisation of key sectors. Second, to examine the developmental needs of SMEs operating in Wales, particularly examining specific factors affecting SME progress in sectors that have been prioritised within the Welsh Government Economic Renewal Programme (ERP). This includes the following sectors:

FOOD ICT ENERGY AND ENVIRONMENT ADVANCED MATERIALS AND MANUFACTURING CREATIVE INDUSTRIES LIFE SCIENCES FINANCIAL AND PROFESSIONAL SERVICES TOURISM CONSTRUCTION 2.2 T he (ERP) was launched in 2010 with the goal of re-energising the Welsh economy. This flagship Welsh Government policy has been highlighted within political circles but with rather less economic critique. Our report first examines key sector policy in order to better understand the rational and underlying objective. In doing so the report highlights some issues. One of the cornerstones of the ERP is to heighten entrepreneurship, small business development and endogenous economic growth. We believe that this can only be achieved where the needs of small firms are fully understood, particularly those operating in defined priority sectors.

2.3 T hen important context for this research is that policy initiatives focusing on priority sectors need to be based on good information about the needs of businesses in these same sectors, particularly smaller firms. In particular, we show that small firms make up an important element of firm stock and employment base within sectors prioritised by Welsh Government. Then understanding the needs and challenges facing these firms could be an important determinant of the success or failure of strategic policy. The report findings draw on existing quantitative data, but also a new survey of the FSB Wales membership. The survey objective was to better understand the current challenges affecting small firms in Wales. Survey themes included access to finance and views on current market conditions. The survey also examined specific sector conditions and core competencies among FSB members in priority strategic sectors. The survey sought to identify both operational and strategic concerns that small firms in priority sectors were facing. 2.4 In what follows we first provide some background to regional economic strategies that have focused on the prioritisation of sectors. Second, we provide some analysis on the small firm sector in Wales, showing the level of small firm economic activity within priority sectors. Third, we outline the method and survey instrument used to derive information on the current conditions facing SMEs in Wales, and with a focus on activity within priority sectors. The fourth and following sections report the main findings from the survey. The final section concludes with some recommendations for policy development.


5

CARDIFF BUSINESS SCHOOL AND FEDERATION OF SMALL BUSINESSES, WALES

3. A SECTORAL APPROACH TO ECONOMIC DEVELOPMENT 3.1 A  common theme in contemporary regional strategies is the identification of sets of key sectors or clusters of inter-related industrial activity. These are assumed to be critical drivers of regional competitiveness. UK Government White Papers on competitiveness during the 1990s (see DTI, 1998) were influenced by Thurow (1992) and Porter (1990). Important was that new growth industries depend on ‘brain power’. UK government strategy then considered the opportunities for growth offered by ‘knowledge industries’ (House of Commons Library, 2000). Developed knowledge-growth principles generated a drive to support key sectors having growth properties and the need to explore clusters of ‘knowledge-based’ activity around distinct spatial nodes (DTI, 2001). These principles quickly filtered down to devolved Assembly initiatives in the UK. 3.2 B  ryan et al. (2006) show that an examination of the resulting regional economic strategies revealed a remarkable consensus on policies to promote local development including clusters and key sectors. Bryan et al. (2006) concluded that there was emerging in the UK a widely held acceptance of the imperative for knowledge creation in key sectors and clusters, but that there was evidence to suggest that the source of this conviction was often anecdotal and heavily recycled, with a reliance on exemplar regions or localities usually outside the UK. A result was that economic strategies across the UK regions contained similar themes, and often encouraged the development of similar sectors and industry groups, and with prioritisation of industries for special attention rarely subject to rigorous analysis, partly because of the absence of robust quantitative and qualitative analytical tools. One corollary was that a sectoral focus was seldom subjected to on-the-ground reality checks, or to any genuine evaluation of the risks.

3.3 Indeed research studies have concluded that many sector based/ cluster based policies have actually failed (see Boschma, 2004 and Cooke, 2007) due to incomplete knowledge about a sectors operations resulting in purely imitating other regions. There is increasing awareness that ‘one- size-fits-all’ regional policy models do not work as the generic nature of this strategy ignores other spatial phenomenon (Todtling and Trippl, 2005). Another reason for caution in picking priority sectors is also found in the work of Boschma (2005) who questions policy inadequacies when it comes to industrial policies particularly around how regions diversify into new growth paths. This work noted that public policy has limited capacity to help in this process. International evidence of targeting sectors is also cautious of its success, the work of Pessoa (2008) talks of “picking winners” when it comes to sector clusters. The evidence from the research hints at a stronger role for laissez-faire as opposed to intervention to select ‘winners’. 3.4 T here is also conflict within the academic literature over the rational for picking priority sectors such as those set out in the ERP. The Welsh Government talks of “innovation” being key to driving success, yet Robertson and Langlois (1995) and Levinthal (1998) note that to innovate there is a need to leave behind “narrow sector perspectives”. These academic works argue that innovation is driven by interaction across the boundaries of sectors. The sectoral approach to regional development that has been implemented with the ERP is then not a new phenomenon and throughout the operation of regional development agencies across the UK, some form of sectoral development was often initiated, but with questions on the success of interventions. 3.5 T he ERP then offers a re-orientation of regional industrial policy to encourage more high growth firms. It is early days yet, but prior evidence questions

how far policies with a priority sector focus might be successful. One factor that could hinge success or failure of a priority sector approach is how it deals with sectoral differences in terms of need and how it treats with size heterogeneity among priority sector firms. 3.6 F or example, the ERP highlights as one of its 5 core priorities that: “We need to concentrate our resources where we can add the most value, acting as an enabler for the economy as a whole rather than a significant direct deliverer of services to individual businesses. We will develop a sectorbased, strategic approach to business support, developing our role as an expert facilitator and enabler.” 3.7 H  owever one thing not directly alluded to in the ERP is the distribution of firm sizes among the priority sectors, and whether different supports needs to be tailored to firms of very different size bands. Indeed criticism has been levelled at the ERP in terms of a possible depreciation of support to local small businesses. 3.8 T here is significant academic evidence to suggest the needs of small firms are considerably different than large firms regardless of sector (See for example, work by Westhead and Storey, 1996, Verhees and Meulenberg, 2004, Thorsten et al., 2008). Research has shown that two areas of persistent concern for small firms are access to finance and business support. Research does not argue against the targeting of business support. On the contrary work by Mason and Brown (2011) found after analysing policy in Scotland, that effective support needs to be targeted and delivered at a regional level. However this research revealed the importance of customization and that heterogeneity exists in firm needs and challenges. This is likely to be an equally relevant finding when priority growth sectors are considered.


6

SMALL BUSINESSES IN PRIORITY SECTORS

4. SMALL FIRMS IN WALES 4.1 T he focus of this section is to examine SME activity in the ERP priority sectors. We accept that this is made difficult because of matching of the sectors to standard industrial classifications. However, first it is useful to reflect on the basic demography of firms in Wales in terms of size classes. Table 1 provides a headline analysis of firm size in Wales. This shows the very large numbers of small and micro firms in the business stock. While in most sectors it is micro firms employing up to 9 people that made up the largest number.

4.2 D  ata provided by the Welsh Government1 in 2009 shows that there were 23,080 private sector enterprises active in Wales in a priority sector. This was 21% of all private sector enterprises. A total of 85,520 private sector enterprises were not in a priority sector. Table 2 gives the breakdown of firm sizes in priority sectors.

http://wales.gov.uk/docs/statistics/2011/110223economicrenewalen.pdf

1

TABLE 1. FIRM SIZE BY SECTOR (WALES 2009) (%) *SOURCE: STATS WALES, 2011

AGRICULTURE 99.2

0.7

0.1

0.0

PRODUCTION 86.1

8.3

3.5

CONSTRUCTION

2.2

97.7

1.8

0.3

0.2

WHOLESALE, RETAIL, TRANSPORT, HOTELS, FOOD & COMMUNICATION

PRIVATE SECTOR HEALTH AND EDUCATION

91.8

92.2

5.8

1.1

1.3

5.7

1.4

0.7

FINANCE AND BUSINESS SERVICES 95.4

2.9

0.8

0.8

OTHER SERVICES 96.8

2.3

KEY

0.6

0.4

MICRO (0-9) SMALL (10-49) MEDIUM (50-249) LARGE (250+)


7

CARDIFF BUSINESS SCHOOL AND FEDERATION OF SMALL BUSINESSES, WALES

4.3 T he table reveals that small firms and sole trader organisations represent over three quarters of 23,080 total firms in priority sectors. Then developments within these small firms and sole traders would be a critical determinant of the success or failure of policy linked to the ERP.

% IN A PRIORITY SECTOR TABLE 2. EMPLOYMENT SIZE BREAKDOWN OF PRIORITY SECTORS 2009 SOURCE: WELSH GOVERNMENT, STATISTICS FOR WALES (2011)

21.2% 9,485

1,850

18.7%

725

24.4%

1,850

22.7% 19.0%

8,390 18.3%

23,080

IN A PRIORITY SECTOR

TOTALS

SIZE BAND KEY

SOLE TRADER (0)

39,915

MICRO (0-9)

44,245

SMALL (10-49)

9,875

MEDIUM (50-249)

3,955

LARGE (250+)

11,610

TOTAL

108,600

f


8

SMALL BUSINESSES IN PRIORITY SECTORS

4. SMALL FIRMS IN WALES CONT. 4.4 T able 3 shows the distribution of firm numbers by employment size classes for the ERP priority sectors. This reveals the differences in demography by sectors. For example, in Advance materials and manufacturing just over two thirds of firms are either sole traders or employ between 1-9 people. However, for most of the remaining sectors this is well over 80%, and reaches 98% in the case of Food and farming.

TABLE 3. DISTRIBUTION OF FIRMS BY EMPLOYMENT SIZE BANDS IN PRIORITY SECTORS: WALES 2011 SOURCE: WELSH GOVERNMENT, STATS WALES (2012)

SIZE OF FIRMS (%)

Zero (0) Micro (1-9) Small (10-49) Medium (50-249) Large (250+)

TOTAL

ADVANCED MATERIALS MANUFACTURING

26.8

40.7

18.3

8.9

5.2

CONSTRUCTION

38.2

52.3

7.2

1.4

0.8 12,135

CREATIVE INDUSTRIES

55.0

37.4

5.1

1.4

1.4

ENERGY & ENVIRONMENT

44.3

44.9

7.0

2.0

1.7 13,990

FOOD & FARMING

74.7

23.4

1.3

0.3

0.3 14,035

FINANCIAL AND PROFESSIONAL SERVICES

46.6

42.4

7.0

2.0

2.0 13,475

ICT

56.0

36.0

4.9

1.5

1.5

2,975

LIFE SCIENCES

29.1

38.0

14.8

11.1

7.4

270

TOURISM

20.3

63.0

13.3

1.8

4.5 T able 4 provides a different slant by examining the distribution of employment by firms in different size bands in the priority sectors. For example in Advanced materials and manufacturing large firms employing more than 250 people made up nearly 61% of sector employment. The corollary is that while small firms made up most of the firm numbers in priority sectors their contribution in terms of total employment is smaller. However, Table 4 reveals strong contribution of firms in the sole traders, small and micro category in most priority sectors. For example in Construction, and Food and farming sole traders or firms employing between 1-9 people made up 35% and 27% of total sector employment respectively.

2,590

2,565

1.5 10,010

4.6 C  onsidering the proportion of turnover of firms of different size bands, Table 5, as expected, shows that large firms generate the largest proportion of sales in most cases. However, micro firms employing 1-9 generate at or over 20% of turnover in Construction, Creative industries, Financial and professional services and Tourism. Sole traders only generate 3% of turnover across all sectors. Once again Table 5 reveals variations in the contribution of SMEs and sole traders to turnover in each priority sector.


9

CARDIFF BUSINESS SCHOOL AND FEDERATION OF SMALL BUSINESSES, WALES

TABLE 4. DISTRIBUTION OF EMPLOYMENT BY FIRM OF DIFFERENT SIZE BANDS IN PRIORITY SECTORS: WALES 2011 SOURCE: WELSH GOVERNMENT, STATS WALES (2012)

EMPLOYMENT (%)

Zero (0) Micro (1-9) Small (10-49) Medium (50-249) Large (250+)

TOTAL

ADVANCED MATERIALS MANUFACTURING

0.5

4.6

11.4

22.9

60.7 85,280

CONSTRUCTION

3.6

31.8

26.5

19.0

19.1 60,905

CREATIVE INDUSTRIES

5.6

22.2

16.0

11.2

45.0 12,835

ENERGY & ENVIRONMENT

3.3

19.4

18.2

17.9

41.2 99,700

FOOD & FARMING

0.7

26.7

11.6

13.4

47.7 29,240

FINANCIAL AND PROFESSIONAL SERVICES

3.5

15.4

13.9

14.4

52.8 119,875

ICT

6.3

14.6

11.5

16.6

51.1 22,565

LIFE SCIENCES

0.8

4.3

9.0

86.0

TOURISM

0.7

22.2

24.5

12.7

39.8 96,970

ALL INDUSTRIES

1.2

11.8

12.7

11.2

63.1 536,410

0.0

TABLE 5. DISTRIBUTION OF TURNOVER BY FIRM OF DIFFERENT EMPLOYMENT SIZE BANDS IN PRIORITY SECTORS: WALES 2011 SOURCE: WELSH GOVERNMENT, STATS WALES (2012)

EMPLOYMENT (%)

Zero (0) Micro (1-9) Small (10-49) Medium (50-249) Large (250+)

ADVANCED MATERIALS MANUFACTURING

0.6

1.3

3.3

10.6

84.2

CONSTRUCTION

6.9

23.8

20.8

18.8

29.8

CREATIVE INDUSTRIES

9.9

26.0

16.2

10.8

37.0

ENERGY & ENVIRONMENT

3.1

7.8

8.1

12.3

68.8

FOOD & FARMING

10.1

18.0

7.2

10.1

54.5

FINANCIAL AND PROFESSIONAL SERVICES

11.9

22.2

16.7

20.1

29.1

ICT

2.1

4.4

4.6

10.4

78.5

LIFE SCIENCES

0.4

2.2

5.9

91.6

0.0

TOURISM

2.9

19.8

14.4

9.0

54.0

ALL INDUSTRIES

3.0

11.0

10.8

12.2

62.9

9,040


10

SMALL BUSINESSES IN PRIORITY SECTORS

5. OUTLINE OF METHOD

6. SURVEY RESPONDENT CHARACTERISTICS

5.1 A  detailed survey was developed that sought to examine small business perspectives on the business environment, finance, trade, and business support. The questions were constructed to allow sector and firm size differences to be analysed. The survey was distributed to the membership of the Federation of Small Businesses in Wales.

6.1 F igure 1 reveals the spatial distribution of firms who responded to the survey. Nearly 40% of respondents were from the Cardiff City region and with 25% from other parts of South Wales. Less than 10% of survey respondents are from Mid-Wales.

5.2 T he survey was sent to 6,000 members of the FSB who have had email addresses. The survey gained 625 responses over a 2 month period (August and September 2012). The distribution of the returns in terms of sectors was broadly in line with the FSB membership as is the geographical distribution of the respondents.

FIGURE 1. GEOGRAPHICAL DISTRIBUTION OF RESULTS

5.3 T he survey comprised a combination of open and closed questions. The survey was designed to incorporate the self classification of firms into sectors. This process allows the identification of what sector firms believe they are in as well as questioning separately whether they are aware of being in a priority sector. The data collected has been analysed to identify the issues of most concern to SMEs in different priority sectors. The survey also allowed the analysis of the recent performance of SMEs in different priority sectors. 5.4 T he first section of the survey asked firms to identify what sector they believed they operated in, this was done by utilising the framework of the Standard Industrial Classification (SIC). This was supplemented by asking firms to report whether they were in a priority sector or not. The next section dealt with the financial performance of the firm, this included questions on turnover and costs over the course of the last year’s trading. The final section sought to explore the areas of concern for the firm, this looked at problems they had faced in the last year of trading as well as the general economic environment. Finally firms were questioned about the different types of business support they thought would benefit them.

29% NORTH WALES

8%

MID WALES

25% SOUTH WALES

CARDIFF CITY REGION

38%


11

CARDIFF BUSINESS SCHOOL AND FEDERATION OF SMALL BUSINESSES, WALES

6.2 F igure 2 shows the ownership structure of firms who responded to the survey. Nearly 45% of firms classified themselves as limited companies, with around one third being sole traders. The distribution described in Figure 2 reveals that the sample contains firms having limited and unlimited liability and with this potentially a factor in determining the nature of responses to questions on support needs.

6.3 F igure 3 shows how the sample was distributed between firms of different ages. Some 39% of the survey respondents were firms who had been in existence for in excess of 14 years. Around 7% of the respondents were new firms which had been in existence for less than one year. Once again we expect firms of different age profiles to respond differently to questions relating to business supports. Many of the younger firms here have come into existence during very testing economic conditions.

FIGURE 2. OWNERSHIP OF FIRMS RESPONDING TO THE SURVEY

FIGURE 3. AGE DISTRIBUTION OF FIRMS

0.3% 6.60% LESS THAN 1 YEAR

1.4% 16.2%

32.6%

0.3%

6.60% 2-3 YEARS

0.2%

6.60% 4-8 YEARS

9-13 YEARS 6.60%

4.2% 44.7%

KEY

SOLE TRADER PRIVATE COMPANY LIMITED BY GUARANTEE

14 YEARS + 6.60%

LIMITED LP LLP GENERAL PARTNERSHIP

f


12

SMALL BUSINESSES IN PRIORITY SECTORS

6. SURVEY RESPONDENT CHARACTERISTICS CONT. 6.4 T able 6 provides the findings on how the survey respondents classified themselves with respect to main sector of operations. Some 64% of the respondents believed that they were part of a sector prioritised in the ERP. Recall that in Table 2 earlier it was shown that just over 20% of the Welsh firms were in a priority sector suggesting a considerable gap between views of survey respondents and official statistical definitions which would be an issue for taking a sector based policy forward.

TABLE 6. BREAKDOWN BY PRIORITY SECTOR SECTOR

RESPONSES (N=625)

CREATIVE INDUSTRIES

49

(7.9%)

INFORMATION, COMMUNICATION AND TECHNOLOGY (ICT) 54

(8.7%)

ENERGY AND ENVIRONMENT

12

(1.9%)

ADVANCED MATERIALS AND MANUFACTURING

19

(3.0%)

LIFE SCIENCES

7

(1.1%)

FINANCIAL AND PROFESSIONAL SERVICES

63

(10.1%)

FOOD AND FARMING

32

(5.1%)

CONSTRUCTION

73

(11.7%)

TOURISM

91

(14.6%)

NONE OF THE ABOVE

224

(5.9%)

6.5 T o explore the sector response component further those who did not identify themselves as being in a priority sector were asked to best describe the industry they operate in. Over 210 responses were collected and the top 10 (based on percentage) are displayed in Figure 4. The data shows a large number of responses from those in agriculture based industries and food production as well as those in manufacturing, including Advanced technologies. What is most interesting to note is that many of these responses could fit into one or more of the priority sectors. Our analysis suggested that a large number (an estimated two thirds) of these who did not self classify as being in a priority sector could actually be in one. This could be a concern if support were to be targeted on a sector basis with some potential beneficiaries of policy being excluded. This finding would also suggest that elements of the small business community struggle to understand the concept of priority sectors and thus could find it difficult to access government support.

FIGURE 4. NON-PRIORITY SECTORS IDENTIFIED BY SURVEY RESPONDENTS CROP AND ANIMAL PRODUCTION 84 FOREST AND LOGGING 59 FISHING AND AQUACULTURE 32 MINING AND QUARRYING 28 MANUFACTURE OF FOOD 25 MANUFACTURE OF BEVERAGES 17 MANUFACTURE OF TEXTILES 17 MANUFACTURE OF APPAREL 16 MANUFACTURE OF LEATHER 15 MANUFACTURE OF WOOD PRODUCTS 14


13

CARDIFF BUSINESS SCHOOL AND FEDERATION OF SMALL BUSINESSES, WALES

7. TRADE PATTERNS 7.1 E lements of the ERP emphasise the importance of improving Welsh export performance. This is a key signal as to the competitiveness of sectors in terms of how far they prosper in both wider UK and then international markets. The survey investigated the direction of trade of the FSB survey respondents. Table 7 reveals that for the sampled firms, the average sales generated within the region was 60% of the total. However, there is wide variation. For example in Advanced material and manufacturing just 14% of firm total sales were generated, on average, in Wales, and in Life sciences 38% (albeit with a small number of responses here). However, responding firms in Food and farming, and then Energy and the environment reported that Welsh sales made up over four-fifths of turnover. 7.2 T able 7 also shows the proportion of respondents who were engaged in exporting overseas. For all sectors (FSB respondents classifying themselves in Priority and Non Priority sectors) some 29% were engaged in overseas exporting. Once again there is strong variation among the respondents within Priority sectors. For example, around three quarters of respondents in Life sciences were engaged in overseas exporting. However, FSB respondents in sectors such as Construction, Energy, Food and farming, Financial and professional services and Tourism, less that 10% of the respondents in each case were engaged in overseas exporting. 7.3 F inally here existing support structures in Wales have sought to encourage SMEs to develop capacity to undertake on line sales. Clearly the scope for on-line sales varies according to sector. Around two-thirds of survey respondents reported that on-line sales were less than 10% of their total turnover. The survey findings (see Table 8) reveal that there was greater scope for on line sales among FSB members in Creative industries, ICT and Tourism.

TABLE 7. PERCENTAGE OF TOTAL TURNOVER GENERATED FROM WALES (PRIORITY SECTOR RESPONDENTS AND ALL SECTOR AVERAGES). PERCENTAGE OF FIRMS IN SECTORS ENGAGED IN EXPORTING OVERSEAS

SECTOR ALL SECTORS

% OF SALES

% INVOLVED IN

GENERATED IN WALES

EXPORTING

60.2 28.7%

CONSTRUCTION

75.6

2.9%

ENERGY AND ENVIRONMENT

80.7

0.0%

CREATIVE INDUSTRIES

55.7

27.8%

FOOD AND FARMING

82.9

7.7%

FINANCIAL AND PROFESSIONAL SERVICES

74.8

3.1%

LIFE SCIENCES

38.3

75.0%

ICT

45.6

36.7%

ADVANCED MATERIALS AND MANUFACTURING

14.0

42.9%

TOURISM

51.7

1.8%

LESS THAN 10%

OVER 61 %

67.2%

10.4%

77.1%

2.9%

100.0%

0.0%

CREATIVE INDUSTRIES

64.7%

23.5%

FOOD AND FARMING

91.7%

0.0%

FINANCIAL SERVICES

86.7%

6.7%

ICT

80.0%

10.0%

LIFE SCIENCE

50.0%

0.0%

ADVANCED MATERIALS AND MANUFACTURING

85.7%

0.0%

TOURISM

23.1%

23.1%

TABLE 8. PERCENTAGE OF SALES GENERATED ONLINE SECTOR ALL SECTORS CONSTRUCTION ENERGY AND ENVIRONMENT


14

SMALL BUSINESSES IN PRIORITY SECTORS

8. BUSINESS PERFORMANCE 8.1 T he next section of the survey treated with business performance and trends in costs. Once again here there was an interest in recent changes in business performance across Priority sectors, and whether there was evidence of ‘greenshoots’ in small firms in prioritised sectors. It is accepted here that firm financial years differ. The survey questions focused on changes to performance and costs experienced by respondents during the last financial year. The survey also sought to examine whether there were differences in performance and costs across respondents in priority sectors. 8.2 T able 9 reveals something of the difficult trading conditions facing businesses in Wales over the last year. For all respondents nearly half reported a decrease in turnover during the last financial year, and with 36% reporting an increase. Once again drilling down into respondents from Priority sectors some interesting differences were found. Caution on generalising from these findings is needed because of small numbers of firms responding from selected Priority sectors. In Advanced material and manufacturing no respondents reported an increase in sales in the last financial year. However, in ICT 63% of respondents reported an increase in sales. In Tourism and Construction 72% and 61% of respondents reported a decrease in sales during the last financial year. Table 9 provides evidence of different prospects for FSB members in Priority sectors coming out of the recession, but also hints at where higher levels of support might be needed in the short term. 8.3 T he next part of the survey focused on labour cost changes during the last year. Clearly there would have expected to be a connection between increases in sales and increases in the main components of costs. For example Table 10 reveals that for all respondents 46% had an increase in labour costs set against the 36% of all sector respondents in Table 9 who reported a sales increase in the same period. It was not possible in the survey instrument to track how far labour cost increases aligned with an underlying increase in employment. However, the overall increases in labour costs sitting beside increases in sales reported in the previous table are possibly linked to underlying improvements in employment conditions across selected sectors.

TABLE 9. SALES PERFORMANCE IN THE LAST YEAR TURNOVER (%)

NO CHANGE

DECREASE

INCREASE

15.8

48.3

35.9

7.3

53.7

39.0

CREATIVE INDUSTRIES

36.4

27.3

36.4

ADVANCED MATERIALS

50.0

50.0

0.0

CONSTRUCTION

17.4

60.9

21.7

ENERGY

50.0

12.5

37.5

FINANCIAL SERVICES

20.0

45.0

35.0

FOOD

36.4

27.3

36.4

ICT

16.7

20.8

62.5

LIFE SCIENCES

57.1

28.6

14.3

TOURISM

10.3

71.8

17.9

NO CHANGE

DECREASE

INCREASE

44.4

9.8

45.8

OUTSIDE PRIORITY SECTORS

35.9

10.3

53.8

CREATIVE INDUSTRIES

58.3

8.3

33.3

ADVANCED MATERIALS

77.8

0.0

22.2

CONSTRUCTION

30.4

30.4

39.1

ENERGY

87.5

0.0

12.5

FINANCIAL SERVICES

41.2

17.6

41.2

FOOD

50.0

0.0

50.0

ICT

50.0

0.0

50.0

LIFE SCIENCES

77.8

0.0

22.2

TOURISM

22.6

9.7

67.7

ALL SECTORS OUTSIDE PRIORITY SECTORS

TABLE 10. LABOUR COSTS IN THE LAST YEAR LABOUR COST (%) ALL SECTORS

8.4 T able 11 reports changes to business profits over the last year. Once again there is some correlation here between findings on turnover change. Around 27% of respondents reported an increase in profits in the last year, with 55% reporting a decrease. Turning to respondents within the Priority sectors over 70% in Construction and Tourism reported a reduction in profits in the last year. However, there were stronger profit performances in ICT and Financial services where 48% and 37% of respondents respectively reported an increase in profits in the last year. Moreover 18% of all survey respondents reported no change in profits in the last financial year. However, across the respondents in Priority sectors the proportion of respondents reporting no change was higher than 18% with the exception of Tourism.


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CARDIFF BUSINESS SCHOOL AND FEDERATION OF SMALL BUSINESSES, WALES

8.5 T he survey also tried to make a linkage between performance and respondent views on how far economic prospects in Wales had strengthened over the last year. The survey results are summarised in Table 12. Overall less than 10% of respondents across all sectors thought the Welsh Economy had improved with 57% believing it had not. There are some sectorial differences but only 3 sectors gave relatively strong positive responses, Creative industries, Financial and professional services and Advanced material and manufacturing. Contrary to this Energy and the Environment and Life science had no respondents agreeing that the economy had improved. 8.6 E xploring the future business direction of the sectors, respondents were asked about the areas where future investment was likely in the next 12 months, Table 13 displays the results. The most likely area of investment is in new machinery and equipment with the least likely being the investment in new premises. There is again considerable variation between sectors in terms of training staff with 66.7% of respondents from Food and farming suggesting that they would be investing in this area, to just 12% in Creative industries. In terms of investment in new machinery and equipment around 38% of respondents reported investment intentions in the next year. Around this average were figures of 57% of respondents in Advanced material to just a quarter of respondents in the priority sectors of Life sciences and Energy.

TABLE 11. CHANGES TO PROFIT IN THE LAST YEAR PROFIT (%)

NO CHANGE

DECREASE

INCREASE

ALL SECTORS

18.0

55.4

26.6

OUTSIDE PRIORITY SECTORS

12.2

58.5

29.3

CREATIVE INDUSTRIES

45.5

45.5

9.1

ADVANCED MATERIALS

50.0

40.0

10.0

CONSTRUCTION

18.5

70.4

11.1

ENERGY

50.0

30.0

20.0

FINANCIAL SERVICES

26.3

36.8

36.8

FOOD

38.5

46.2

15.4

ICT

23.8

28.6

47.6

LIFE SCIENCES

62.5

25.0

12.5

TOURISM

12.5

72.5

15.0

TABLE 12. THERE HAS BEEN AN IMPROVEMENT IN THE WELSH ECONOMY IN THE LAST YEAR SECTORS (%)

AGREE

DISAGREE

ALL SECTORS

9.6

57.4

CONSTRUCTION

5.9

52.9

ENERGY AND ENVIRONMENT

0.0

62.5

CREATIVE INDUSTRIES

23.5

47.1

FOOD AND FARMING

6.7

60.0

23.3

43.3

LIFE SCIENCES

0.0

66.7

ICT

6.5

51.6

14.3

57.1

3.8

73.1

FINANCIAL AND PROFESSIONAL SERVICES

ADVANCED MATERIALS AND MANUFACTURING TOURISM

TABLE 13. AREAS OF INVESTMENT IN THE NEXT 12 MONTHS (%) EXISITING NEW EQUIP/ HIRE NEW TRAINING EXISTING STAFF ALL SECTORS

STAFF MACHINERY

MOVE

STAFF PREMISES

36.9

37.6

28.2

15.2

CONSTRUCTION

42.9

42.9

28.6

11.8

ENERGY AND ENVIRONMENT

37.5

25.0

25.0

0.0

CREATIVE INDUSTRIES

11.8

41.2

11.8

17.6

FOOD AND FARMING

66.7

53.3

40.0

13.3

FINANCIAL AND PROFESSIONAL SERVICES

36.7

30.0

35.5

12.9

LIFE SCIENCES

50.0

25.0

75.0

50.0

ICT

41.9

45.2

38.7

25.8

ADVANCED MATERIALS AND MANUFACTURING

71.4

57.1

57.1

28.6

TOURISM

21.8

29.6

10.9

3.8


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SMALL BUSINESSES IN PRIORITY SECTORS

9. METHODS OF FINANCING 9.1 T he issue of finance has been a major concern for SMEs in Wales and as such our survey examined the methods of financing used by firms. Firms were asked to indicate what their primary source of funding for day to day business activity was. Table 14 displays the results. The most common funding was obtained from bank overdrafts, credit lines or credit cards and overdrafts. Around 27% of respondents reported these as primary sources of funding. The least common source was a Welsh Government grant. Over one fifth of those who responded said retained earnings from the sale of assets was the primary source of funding. Looking across the sectors there are some variations, Life sciences and ICT have both seen much larger numbers of firms accessing Welsh Government grants with 14.3% and 9.1 % respectively of respondents in these sectors indicating they have used this source of funding. Retained earnings, although common in other sectors was used by less than 10% of respondents in Energy and the environment, Advanced materials and manufacturing and Tourism. This mix of funding sources across sectors suggests the financing options for firms in Wales is quite diverse but worryingly over a quarter of respondents are using unsecured sources of finance for day to day activity.

9.2 T able 14 displays the results when respondents were asked about the main mode of financing. The Table reveals that over a third of respondents had no need for a loan, given the current market this is an interesting finding and might be explained by a quarter of firms funding growth through retained earnings or sales. The most common method of financing across all sectors was bank overdrafts or credit cards, a worrying trend given the unsecured nature of these loans. The least common method was a Welsh Government grant or subsidised bank loans.

TABLE 14. SOURCE OF FINANCE FOR DAY TODAY OPERATIONS (%)

SECTOR

RETAINED GRANTS OR EARNINGS OR SUBSIDISED BANK SALE OF ASSETS LOAN

CARDS OVERDRAFT

BANK LOAN

TRADE CREDIT

OTHER LOAN

LEASING OR HIRE PURCHASE

BANK OVERDRAFT,

WELSH GOV GRANT

CREDIT LINE OR CREDIT

ALL SECTORS

21.5

3.2

2.5

26.6

8.8

19.2

6.3

11.9

CONSTRUCTION

18.8

5.9

0.0

29.4

0.0

29.4

11.8

17.6

9.1

0.0

0.0

45.5

0.0

27.3

0.0

18.2

CREATIVE INDUSTRIES

36.4

4.5

0.0

31.8

0.0

18.2

4.5

4.5

FOOD AND FARMING

13.5

5.4

2.7

27.0

13.5

18.9

8.1

10.8

FINANCIAL AND PROFESSIONAL SERVICES

13.0

0.0

0.0

34.8

15.2

15.2

8.7

13.0

LIFE SCIENCES

28.6

0.0

14.3

28.6

0.0

0.0

0.0

28.6

ICT

36.4

6.8

9.1

20.5

4.5

15.9

4.5

2.3

ADVANCED MATERIALS AND MANUFACTURING

5.9

5.9

0.0

29.4

0.0

29.4

11.8

17.6

TOURISM

8.9

1.7

0.0

21.5

8.9

13.2

18.1

10.5

ENERGY AND ENVIRONMENT

TABLE 15. INTEREST CHARGES IN THE LAST YEAR INTEREST CHARGES (%) ALL SECTORS OUTSIDE PRIORITY SECTORS CREATIVE INDUSTRIES ADVANCED MATERIALS CONSTRUCTION ENERGY FINANCIAL SERVICES FOOD ICT LIFE SCIENCES TOURISM

NO CHANGE

DECREASE

INCREASE

44.3

6.1

49.5

47.9

2.7

49.3

63.6

0.0

36.4

66.8

0.0

33.3

27.3

6.1

66.7

77.8

11.1

11.2

50.0

0.0

50.0

50.0

0.0

50.0

41.2

11.6

47.4

100.0

0.0

0.0

17.1

9.4

73.7


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CARDIFF BUSINESS SCHOOL AND FEDERATION OF SMALL BUSINESSES, WALES

10. CHALLENGES FACING BUSINESS 10.1 M  oving next to general problems facing businesses in Wales Table 16 examines financial as well as other concerns such as access to skills and materials. The two greatest concerns facing survey respondents across all sectors were increased business costs and taxes. Around 40% of survey respondents cited increasing costs and tax levels as problems that they were facing. Table 16 shows limited variance in these findings across the priority sectors. In terms

of access to finance this seemed to be more of a problem for respondents in Advanced materials and Life sciences. Poor cash flows appeared not to be a particular problem for respondents in Food and farming, Life sciences and Tourism. Problems in terms of gaining access to skills appeared to be much less of a problem in Advanced material in manufacturing. Business rates were cited as a problem for nearly half of respondents in the Food and farming sector.

TABLE 16. KEY PROBLEMS FACED BY SURVEY RESPONDENTS (% OF RESPONDENTS CITING PROBLEMS FROM EACH SECTOR) DIFFICULTY POOR FINDING SKILLED CASHFLOW WORKERS

INCREASED BUSINESS COSTS

ACCESS TO FINANCE

POOR SALES

ALL SECTORS

27.3

29.0

26.8

19.6

40.2

17.8

39.2

CONSTRUCTION

31.7

22.9

35.7

17.6

39.9

17.2

35.0

ENERGY AND ENVIRONMENT

28.5

24.4

43.9

23.1

28.5

8.3

43.3

CREATIVE INDUSTRIES

23.7

34.8

29.3

22.7

37.4

17.2

34.8

FOOD AND FARMING

33.2

20.5

13.8

26.2

46.9

10.3

49.1

FINANCIAL AND PROFESSIONAL SERVICES

32.5

30.3

26.3

25.9

36.0

6.7

42.3

LIFE SCIENCES

40.0

34.3

14.3

28.6

20.0

28.6

34.3

ICT

27.3

36.1

29.9

24.6

36.1

13.6

32.5

ADVANCED MATERIALS AND MANUFACTURING

40.0

33.3

40.0

6.7

33.3

20.2

26.7

TOURISM

24.6

33.7

21.1

20.5

41.3

22.1

36.7

SECTOR

10.2 T he survey then expanded on this area by examining the key areas of support businesses thought could improve their activity. Table 17 displays the results. Marketing is a stand out area where respondents across all sectors believed additional support would be useful to them. Over half of all respondents also cited financial advice and IT/computing assistance as areas where additional assistance would be valuable.

MAINTAINING GOOD TAXES INCLUDING SUPPLIER RELATIONS BUINESS RATES

10.3 T he variation in responses across the priority sectors is again of interest. For example, while around 70% of respondents in Construction, Energy and Tourism cited financial advice as a means of improving their activity, this fell to 32% in ICT. Legal advice was important to over half of respondents in Construction, Energy, Financial and professional services, and Life Sciences but important to just 14% of firms in Advanced material and manufacturing. A key issue going forward is the small numbers of respondents who believed that business support in terms of export support was important. Life sciences was the one exception here. This may link to simple lack of opportunity to export or more problematically a simple lack of ambition in this direction. However, in summary, the table shows that business support priorities vary according to sector.

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18

SMALL BUSINESSES IN PRIORITY SECTORS

10. CHALLENGES FACING BUSINESS CONT. 10.4 T urning next to existing business support provision. One survey question asked respondents whether they had faced problems in finding Welsh Government business support. Table 18 displays the percentage of respondents who found it difficult to find business support. On average over 43% of respondents across all sectors reported problems in finding appropriate Welsh Government business support. Table 18 reveals that in Food and farming a quarter of respondents had experienced difficulties in accessing Welsh Government support, but this grows to 50% in the case of Life sciences respondents.

TABLE 18 PROBLEMS IN ACCESSING WELSH GOVERNMENT BUSINESS SUPPORT

ALL SECTORS KEY

44.1

SECTOR

CONSTRUCTION ENERGY AND ENVIRONMENT

%

FOOD AND FARMING 50.0

41.9

ADVANCED MATERIALS AND MANUFACTURING TOURISM

10.6 H  owever, in no cases irrespective of sector does respondent awareness exceed 50%. On the positive this may simply be a reflection of some firms simply not requiring business support. However, linking this to earlier findings on needs

25.0

LIFE SCIENCES ICT

42.9

48.1

CREATIVE INDUSTRIES

37.5

PROBLEMS IN ACCESSING BUSINESS SUPPORT

10.5 T he survey asked about respondent awareness of different types of support funds available in Wales. Table 19 displays the results of the knowledge of respondents over the existence of current support programmes. Across respondents in all sectors there was strongest awareness of JEREMIE funds but rather lower levels of awareness on other supports.

42.7

46.3

for support would suggest that this lack of awareness is a serious issue for policy makers. Two of the support mechanisms, JEREMIE and the Economic Growth Fund were not recognised by any of the respondents from Creative industries or Life science.

TABLE 19 RESPONDENT UNAWARENESS OF WELSH SUPPORT FUNDS MICRO-BUSINESS LOAN FUND

WALES SME INVESTMENT FUND

REPAYABLE BUSINESS FINANCE

LOCAL INVESTMENT FUND

JEREMIE

ECONOMIC GROWTH FUND

ALL SECTORS

76.4

67.0

72.3

68.7

90.8

78.4

CONSTRUCTION

82.4

67.6

73.5

76.5

85.3

73.5

ENERGY AND ENVIRONMENT

85.7

71.4

57.1

57.1

85.7

71.4

CREATIVE INDUSTRIES

76.5

82.4

82.4

94.1

100.0

100.0

FOOD AND FARMING

69.2

69.2

69.2

69.2

92.3

76.9

FINANCIAL AND PROFESSIONAL SERVICES

72.4

65.5

69.0

55.2

86.2

75.9

ICT

74.2

71.0

67.7

74.2

90.3

74.2

100.0

50.0

75.0

75.0

100.0

100.0

ADVANCED MATERIALS AND MANUFACTURING

71.4

57.1

71.4

28.6

100.0

66.7

TOURISM

75.5

61.5

75.5

66.0

92.5

79.2

SECTOR

LIFE SCIENCES


CARDIFF BUSINESS SCHOOL AND FEDERATION OF SMALL BUSINESSES, WALES

19

11. CONCLUSION: ERP AND SMALL FIRMS 11.1 The actions that form part of the ERP programme are expected to support the development of specialist economic activity in priority sectors through dedicated sector panels. These sectors have been chosen by the Welsh Government on the basis of being identified as providing the greatest opportunity for economic growth. The role of SMEs in the ERP is significantly less clear. There is a great deal of conjecture over precisely how ingrained SME activity is directly supported by the sector approach of the ERP. There is a need to assess whether this approach to industrial development in Wales is the most appropriate one for SMEs.

11.2 The first and most critical piece of evidence for this debate is whether SMEs can easily put themselves into the priority sectors. From the evidence in this report it is clear that the vast majority of SMEs are unaware of what sector best fits their businesses.

11.3 Furthermore those that did not put themselves in a priority sector, as given by the Welsh Government definitions, actually did so when given a more disaggregated comprehensive breakdown. This was particularly noticeable in Advanced materials and manufacturing and Financial and business services, where certain niche activities such as publishing and marketing and manufacturing equipment production appeared to be identified less as being part of a priority sector by small firms.

11.4 The study carried for this report also examined the configuration of the priority sectors from an SME perspective. Multiple dimensions have been used to scope the differences in activity across sectors.

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SMALL BUSINESSES IN PRIORITY SECTORS

11 CONCLUSION: ERP AND SMALL FIRMS CONT. First Trade is considered both in a conventional sense and online. The first thing to note is the great variability amongst sectors when it comes to activity taking place in Wales. Some sectors such as Life science have the majority of their business activity outside Wales, whereas Food and farming sees much of their sales coming locally. Exporting is another key line of distinction with some sectors not involved at all whereas others such as ICT seeing 42% of sales been due to exports. Online trade is less of an issue with most sectors having less than 10% of their turnover as a result of the internet.

11.5 Financial performance is thought to be one of the underlying rationales of the ERP. When looking at the financial performance of the sectors there appears to be some patterns within the data but overall there remains a stochastic trend to the figures. Sales have remained fairly constant over the period 11/12 with nearly 50% of respondents finding either little change or even increases.

11.6 The report finds costs have increased across the board. Sectorially creative industries appear to be very different to other industries with the highest constraints on profitability.

11.7 Again financing appears to have little sectorial variation with most firms reporting the same constraints and methods used. A worrying trend is the use of credit cards and overdraft facilities, methods which traditionally carry high levels of interest. Across the board the methods appear to have similar usage thus would imply that far from it being sector specific there is a great deal of homogeneity.


CARDIFF BUSINESS SCHOOL AND FEDERATION OF SMALL BUSINESSES, WALES

11.8 When looking at business support and the areas where firms feel they need support there are only subtle sectoral differences. Marketing is a stand out area where all sectors feel that they could benefit from some form of support. IT and computing infrastructure and Legal advice also reports highly across the board. The only area with significant difference is in exporting. Turning to the methods of support currently offered by the Welsh Government across the sample there is a lack of knowledge on any of the support funds, sector specific or otherwise. Taking into account the findings from both these pieces of data there is significant support for the idea that far from being sector specific there might be a need for generic support with a great emphasis on promotion.

21


22

SMALL BUSINESSES IN PRIORITY SECTORS

REFERENCES Boschma, R. (2004) "Competitiveness of Regions from an Evolutionary Perspective," Regional Studies,, vol. 38(9), pages 1001-1014. Boschma, R. (2005) "Proximity and Innovation: A Critical Assessment," Regional Studies , vol. 39(1), pages 61-74. Bryan, J., Jones, C., Munday, M. (2005) "Investigating The Potential Of Key Sectors Using Multi-Sectoral Qualitative Analysis: A Welsh Case Study" Environment and Planning C: Government and Policy, volume 23(5), pages 633 – 656 Cooke, P. (2007) "How benchmarking can lever cluster competitiveness" International Journal of. Technology Management 38(3), pages 292-320 DTI, (2001) “Business Cluster in the UK – A First Assessment”, Department of Trade and Industry, UK Government. Levinthal, D. (1998) “The slow pace of rapid technological change, gradualism and punctuation in technological change”. Industrial and Corporate Change 12(7), pages 217-247. Mason, C., Brown, R. (2012) “Creating good public policy to support high-growth firms”. Small Business Economics. 38 (4), pages 399-418.

Porter, M.( 1990) The competitive advantage of nations. New York: The Free Press. Robertson, P.,Langlois, L. (1995) "Innovation, networks, and vertical integration," Research Policy, vol. 24(4), pages 543-562. Thorsten, B., Kunt, D., Martine, M. (2008). "Bank Financing for SMEs around the World: Drivers, Obstacles, Business Models, and Lending Practices," Policy Research Working Paper Series 4785, The World Bank. Thurow, L. (1992) Head to Head: the coming economic battle among Japan, Europe, and America. New York: Morrow. Todtling, F., Trippl, M. (2005) "One size fits all?: Towards a differentiated regional innovation policy approach," Research Policy, vol. 34(8), pages 1203-1219 Verhees, F., & Meulenberg, M. (2004) “Market Orientation, Innovativeness,Product Innovation, and Performance in Small Firms”. Journal of Small Business Management, 42(2), pages 134-154. Westhead, P. and Storey, D. (1997) Training Provision and Development of Small and Medium– Sized Enterprises, Research Report No. 26, London: DfEE.


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CONTACT DETAILS Dr. Andrew Crawley Tel: +44(0)29 2087 5079 Email: crawleyAJ@cardiff.ac.uk

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