Let’s get down to business
August 01, 2016
PwC research suggests that, by 2014, 6% of the total UK workforce were engaged in jobs that didn’t exist in 1990. And now the World Economic Forum forecasts that 65% of children entering primary school today will ultimately work in new job types that aren’t even on our radar yet.
A thriving economy delivering new businesses in this new “world in beta” is dynamic and adaptable, but it also demands innovation and entrepreneurship. New businesses bring more than just adaptability, though; they drive competition, consumer choice and productivity. And they drive jobs growth.
The events of the last month have made these things even more important to the UK. We have been faced with stagnant productivity since the global financial crisis and leaving the European Union may exacerbate the problem if foreign direct investment (FDI) and net exports fall.
Theresa May, the new Prime Minister, has spoken of the importance now for “deep economic reform” and “more opportunities for young people to get on.” As a catalyst for jobs and productivity, the growth of new businesses will have an even bigger role to play.
Young businesses create jobs
Figure 1 illustrates the positive relationship between growth in new businesses and the change in employment within local authorities over the past decade. Areas with an upward trend in business start-ups were much more likely to see employment grow over the period. Local authorities in the top quarter for new business growth saw, on average, 14 times more employment growth than those in the bottom quarter.
Figure 1: A positive relationship between business births and employment growth
Of course, simply establishing new businesses isn’t the end goal in itself. What really matters is the scaling up of new businesses that become the household names of the future with large workforces, driving the local and national economic engine. But every large business had to start somewhere and births are therefore a strong leading indicator of this scale up.
Furthermore, strength in business births is indicative of what one might call the “ease of doing business” relating to infrastructure, the availability of skills and other factors that also form part of the Demos-PwC Good Growth for Cities index. So let’s take a look at where we see the most start-ups…
Entrepreneurs, where are you?
Like many other economic indicators, new business creation is not spread evenly across the UK, but the trend is even starker than you might expect. Looking at the map in Figure 2, we can see that the business birth rate varies across the country. Three themes seem to emerge:
- London stands head and shoulders above the rest of the UK: of all cities covered by the Good Growth for Cities Index the number of new businesses per head in London is a third higher than even the second best scorer (Reading and Bracknell)
- Beyond London, the general “South” also stands out. 8 out the top 10 cities for new businesses are in the Southern regions of England, the exceptions being Aberdeen and Manchester, then latter city which substantially outperforms its peers in the “Northern Powerhouse.”
- Scotland, Wales and Northern Ireland significantly lag England, while Edinburgh and Cardiff sit in the bottom half of the index, with the fewest new businesses are seen within Belfast.
Figure 2: Regional variation in new business births
The answers: money and people
Creating and maintaining an attractive business environment is one of the top priorities for policymakers. And indeed, many of the factors that facilitate business creation also contribute to wider economic and personal wellbeing.
From a policy perspective, access to finance and to talented people are two key focus areas. Lack of funds is one of the most common reasons preventing entrepreneurs from following through with their business ideas. Start-up subsidies and targeted loans have been proven successful in other EU countries and more recently, options such as crowdfunding and peer-to-peer lending have become increasingly popular.
A strong local education system is also key to enhancing the pipeline of talented people: indeed we see more new businesses set up close to top universities such as Oxford, Manchester and Bristol. But the focus should be on the type of education and translating that into opportunities to prevent the drain of the highly-educated away from regional cities to London. The recent rise of degree apprenticeships shows a lot of promise, providing a more practical experience to learn business and management skills, often linked to long-term opportunities to retain talent.
The “right” answer will not necessarily be the same everywhere - the Good Growth for Cities Index demonstrates that each city has its own strengths. But starting and scaling up new businesses is a key ingredient and one that we will add to this year’s Good Growth for Cities Index.
 New job creation in the UK: which regions will benefit most from the digital revolution? UK Economic Outlook, March 2015 http://www.pwc.co.uk/assets/pdf/pwc-uk-economic-outlookreport-march2015.pdf
 The World of Labor found that new firms (compare to incumbent firms invest more in new opportunities, potentially driven by inertia and/or fear of cannibalizing their own markets
 Leaving the EU: Implications for the EU economy http://news.cbi.org.uk/news/leaving-eu-would-cause-a-serious-shock-to-uk-economy-new-pwc-analysis/leaving-the-eu-implications-for-the-uk-economy/
 A start-up subsidy in Germany was available for unemployed persons with long-term success