Merger or Acquisition?
11th June 2009
This week the UK government announced that it has merged two key spending departments: the Department for Business, Enterprise and Regulatory Reform (BERR) and the Department for Universities, Innovation and Skills (DIUS). In the government’s words, this creates a single department, “committed to building Britain’s future economic strengths. To compete in a global economy and create the jobs of the future Britain requires a regulatory environment that encourages enterprise, skilled people, innovation, and world-class science and research."
From a business perspective, the merger makes complete sense and is in fact something that commentators and analysts, looking for a role for the then Department for Trade and Industry, urged many years ago. It links innovation and skills developments explicitly to the needs of business for the first time in the UK. It links the drivers of the productive base of the economy together in a streamlined way. It will ensure that closing the performance gap with our overseas competitors, particularly the United States, is the clear responsibility and focus of one government department. It also changes the language of innovation and skills – making it focused on the long term performance of the UK economy which Professor Michael Porter said was a key weakness back in 2003.
It is important that the merger remains just that though. As a combined department, it has no less than eleven ministers, six of whom are Lords and therefore unelected, and one enterprise czar – Sir (soon to be Lord) Alan Sugar. It has a remit for everything from vocational training through pure research and development to entrepreneurship, enterprise and regulation.
The dangers are obvious. As one of the biggest Whitehall spending departments it has a huge amount of potential to make a lasting difference to the way in which the further and higher education systems work with industry as we emerge from the current downturn. It is at last an opportunity to break down some of the communication barriers between the research base in universities and the business community which has hampered our capacity to commercialise brilliant science in the past. This should be a hugely exciting agenda for all concerned.
But if business is actually taking over the skills and innovation agenda, then we should temper our optimism with a degree of caution. Innovation and entrepreneurship (whether in start-ups or in global multinationals) rest entirely on a strong but “pure” education infrastructure that conducts leading edge research, encourages learning in and for itself and that provides a blue-sky creative base on which to build.
It's possible to imagine the Ministers dusting off their Strategic Management textbooks. Just how would Henry Mintzberg recommend they manage the organisational change in this merged conglomerate? These are two quite different departments with historically very different roles. The Office of Science and Technology, the Technology Strategy Board, the Research Councils and the Universities all rest within its remit, though, and its ministers would do well to bear in mind their diverse agendas if they are going to make this the success that we all need.
Unemployment – a threat or an opportunity?
4th June 2009
This week 4,000 representatives of governments, employer organisations and employee representatives began their International Labour Conference in Geneva. The meeting lasts for over two weeks and includes a Summit from the 15th-17th June where Heads of State, Vice Presidents and trade union leaders will discuss “effective responses to the growing impact of the economic and financial crisis on employment, social protection and the world of work.”
The event is convened by the International Labour Organisation (ILO) whose dismal report in May predicted that world wide unemployment would increase to 239 million people from the previous suggestion of 210 million. There will be significant increases in the numbers in developing countries that classify as “working poor” or in “vulnerable employment”. The report suggests that there will be an unprecedented 200 million people living on less than $2 a day by the end of 2009 and that there will be 17 million young people worldwide who are unable to find work.
The crisis will persist, the ILO argues, not least because the full effects of a recession on the workforce usually take four-five years to work through the global economic system.
While all this is going on, Europeans are voting for a new Parliament. It was timely, then, that José-Manuel Barroso, the European President, put out a plea to European Member States to prioritise jobs and decent work in their countries alongside the measures they have already implemented to rescue their economies from the brink of collapse.
He is proposing that for example, all Member States encourage short term working on reduced salaries that allow employees to retrain and he suggests ways of encouraging young people into the labour market and keeping them there. As of the 3rd June, €19billion from the European Social Fund is to be made available for vocational training and other active support measures, including business support.
But most interestingly of all, the European Union and European Investment Bank, along with private investors, are committing up to €500 million in financing for employment. This is funding for new entrepreneurs to help them overcome any access to finance barriers that might prevent them setting up a business when they lose their jobs.
Barroso’s message was that all Member States should have similar, active, employment policies that encourage people to take up self-employment or enterprise. This is a simple and positive message. So long as people who lose their jobs are given guidance and support through the early stages of starting up, alongside credit and microfinance facilities, there is every chance that the world can use the downturn to positive effect. After all, amongst those who lose their jobs will be some who see huge opportunities for growth, even in a recession.
For developing nations, the situation is clearly more complicated since levels of poverty are so severe that simply suggesting that there is more entrepreneurship could exacerbate problems of vulnerable employment rather than create a sustainable solution. Nevertheless, with some careful planning, organisations like the International Labour Organisation have a tremendous opportunity to promote policies that will help people move from subsistence to sustainable enterprise.
Organisations like Afford-UK (http://www.afford-uk.org/) help support the diaspora based in the UK take their expertise and know-how back to African communities to help them develop sustainable employment through enterprise. As unemployment threatens to decimate the world’s developing nations, the expertise of people in developed nations who have been entrepreneurs but who truly understand entrepreneurship in the world’s most challenging environments will perhaps be our most valuable asset.
Creating the entrepreneurial ecosystem through business support
28th May 2009
The role of business support in stimulating entrepreneurial activity is a vexed issue. European governments tend to look over the pond to the US where they see entrepreneurs driving innovation and change without obvious support from the public sector. They want to achieve the apparent productivity gains that the US economy saw in the 1990's and early part of this decade and, since the Lisbon Agenda of 2000, have been wrestling with just how to do this.
The dilemma for policy makers is simple to understand: there is a level of business support that is necessary in order to "let a thousand blossoms bloom" and encourage start-up activity. Much of this activity is unlikely to succeed if venture capital estimates are anything to go by. For public policy, then, the choice is unpleasant: are businesses allowed to start and then flounder once they cannot attract private sector investment or a commercial revenue stream, or does the public sector get locked in to supporting business largely on welfare grounds that would otherwise collapse?
Nowhere has this been more clearly demonstrated than in the former eastern German States. There are two regions, Sachsen-Anhalt and Thueringen, which have created sustainable employment and growth through science-based entrepreneurship. Similarly, the burgeoning service sector in eastern Germany is more competitive in many areas than its western counterparts and has stemmed from regional government programmes that have provided both support for cluster-building activity and mechanisms for regions to become increasingly more commercially competitive over time. The growth of the biotechnology sector in Germany is another example of how these programmes have worked.
Yet there are still tracts of eastern Germany which remain entirely supported by public policy measures, in part from State governments supported by the European Union and in part by the German national government. For these regions, Mecklenburg-Vorpommern being one, if the government withdrew its support, employment would collapse and outward migration of young talent would accelerate.
Yet even in the US, government support at the very earliest stages of development is justified on the grounds that there is a pre-start and early stage level in which the private sector has no interest. The risks are high because failure is high. But if government can provide the support and infrastructure in the form of business advice, access to finance, coaching, mentoring and research and development partnerships, then the businesses that are founded at this stage will have the potential to move to a second phase.
This second phase is one where there is more commercial interest, businesses begin to grow and flourish but there is nevertheless a role for the public sector in guaranteeing the risks that the private sector is taking.
At a third, growth, phase, there is little role for government since the private sector can calculate risks and returns clearly but at a fourth stage, where wealth has been created, the public sector can provide incentives for entrepreneurs and investors alike to re-invest their time and their resources in helping entrepreneurs who are starting out on their entrepreneurial journeys.
The support needs of the entrepreneur change over time and public and private sector support should change to reflect this.
Of course, how success is measured at each stage is critical so that governments can justify the investments they are making and the risks they are taking. In the first, and arguably the second, stage of development the benefits come in terms of additionality: the extra skills, the innovation capacity or the job creation potential that is created rather than the hard productivity of these fledgling entrepreneurial firms. But by the time the enterprises are set on a growth path with several years of visible turnover and employment growth, it then becomes possible to measure the value that is being created.
The key is to choose measurements that are the right ones for the right stage of development. Much policy effort across Europe has, correctly, gone into phases one and two which are critical to creating the entrepreneurial ecosytem upon which we all rely for economic development and change. The policy challenge is how to remove support gradually to allow the private sector to engage.
Women's businesses and the recession: is there really a differential impact?
21st May 2009
In times of economic crisis, there is always talk of particular groups who are likely to be more disadvantaged than others by events and this one is no exception. At the end of 2008, a flood of publications came out that pointed to a differential impact on women: it appeared that they were more likely to exit from employment and more at risk of unemployment because of they were more likley to be in vulnerable sectors (services and retail) and more likely to be on temporary or part time contracts.
Since that flurry of news stories, responses have become more measured: it appears that at the moment at least, women are not more affected, either in terms of their jobs or, indeed, in terms of their businesses than men.
Two reports publish this week provide some background to the debate in the UK at least. The first is the Trade Union Congress's regular "Recession Report" which suggests that although women are losing their jobs, they are not doing so any faster than men. It argues, in line with work earlier this year by the Chartered Institute of Personnel Development that young people are more affected than any other group.
The second is a report published by the Women's Enterprise Task Force. This report suggests that women business owners and managers are more confident about the economic situation generally and that women entrepreneurs are less likely to be fazed by the macroeconomic climate than men. They tend to use business support services more and to be using positive management techniques to be working through the current crisis. While many of the women interviewed for the work argued that they were tightening their belt, they were less worried about their credit profile and profitability than men.
It would be disingenuous to suggest that women are not going to be affected by the recession at all. Women and their capacity to contribute to household income through their businesses or through their work has contributed to economic development and growth in developed and emerging economies. We have seen big increases in female labour market activity in every country over the past ten years and this is to be celebrated.
But as women inevitably leave the labour market and their businesses close during the current downturn, the key for governments and financial support organisations across the world to provide appropriate mechanisms for helping women to rebuild as the economy picks up again. There is surely a role for helping them to transition into entrepreneurial activity as a pillar of that strategy.
The future of Europe?
14th May 2009
At the end of Europe's first SME week, what have we learned? There have been a swathe of announcements, including the launch of "Your World, Your Business" for young entrepreneurs and a glitzy event in Prague to announce this year's winners of the European Enterprise Awards. All this took place under the strap-line, "Promoting entrepreneurs means creating jobs."
In the current economic climate, it is re-assuring to see that the EU has not diminished its support for the SME community. After all, 100m people are employed in Europe's 23 million companies with less than 250 employees. These are the entrepreneurial companies that are potential drivers of an innovative and productive future.
Europe has, roughly, a 20% productivity gap with the United States and while it's possible to address some of this through the labour market (increasing hours worked in particular) and creating economies of scale, greater internal trade, more internal cross-border investment and labour migration through the effects of reforms to the Single Market.
But this is only ever going to keep Europe standing still. There is an innovation and entrepreneurship gap which underpins the productivity differences between Europe and the United States and, of course, the differences in rates of development between some of the newer member states and the older ones. It is here where entrepreneurs and innovators in the small business sector have a vital role to play.
Future growth and development depends on strong research and development and the effective commercialisation of that research and development through small innovative businesses that will eventually grow larger. The small and medium sized sector in Germany, France and parts of Italy are geared up to compete in a global world where India and China are snapping at the heals of Europe's innovators with high levels skills and, increasingly, technologies that threaten the position of Europe at the leading edge in key sectors. If Europe does not compete at the leading edge of technology, then newly emerging regions of the world will quickly overtake as the suppliers of ideas and development across the world.
But these are also the companies that are hardest hit by the current downturn: their markets have dried up and their supply of credit to cover cash flow is tight. This threatens the long term investments and sustainability of these companies. Equally, the new member states have found themselves opened up to global financial markets and credit in a way that also undermines the work that has been done to transform their economies through innovation and enterprise in the last ten years.
Quite rightly, the European Commission is maintaining its commitment to support the entrepreneurial and small business sector in the downturn. The European Investment Bank has made resources available in the same way that national governments within member states have and there are new routes to mezzanine finance and risk capital to ensure that where there is growth potential, it can be realised. The programmes to support collaborative research across Europe like Eurostar and EUREKA allow small companies to develop and commercialise research with cutting edge scientists from across the EU. But the sector is passive: in times of recession, why would a small company, however innovative it may be, take time out to go to a conference or event unless it can see real value? More pressing cash flow and profitability concerns will exist.
This is the real challenge for the EU: the entrepreneurial sector is hard to engage with the science base. To make the resources really useful, there have to be more than events and the perpetual pursuit of more funding. Entrepreneurs will participate if they can see long term growth paths for themselves out of any collaborative projects and this is the nettle that policy makers need to grasp. Funding must be supported by commercialisation advice as well.
Why it makes sense to back entrepreneurs
May 7th 2009
A venture capitalist once said to me, "You'll never get an economic model to prove that entrepreneurs create economic growth. But I'll tell you one thing. You'll never get economic growth without them."
In the current febrile atmosphere, where there is talk of the collapse of financial Capitalism while the economy goes to hell in a hand cart, we would do well to reflect on the past nearly 200 years of industrialisation. Each new technology and each innovation that has driven real social and economic development has started with a dissatisfaction amongst a small group of people with the current situation. After all, why do people invent things? To solve a problem that stops them from being able to carry out their daily lives or their work as effectively as they could.
Entrepreneurs are well-known for their dislike of anything too theoretical, but when they are looking for advocates, they could do worse than look to the evidence provided by three economists: Nikolai Kondratiev who argued that economic growth ran in 50 year cycles, Joseph Schumpeter who argued that large businesses would become complacent and uninnovative - in so doing they would provide "creative" opportunities for entrepreneurs and sow the seeds of their own destruction - and Chris Freeman who, some 50 years later, connected long-waves with creative destruction and argued that the 50 year cycles could be linked to major shifts in technology - generated of course by scientists, innovators and commercialised by entrepreneurs.
So where does this leave us now? There has been relatively little talk about the world's entrepreneurs during the current crisis, although plenty of talk about propping up big business. Quite rightly, governments have sought to shore up the small business sector, simply because of the significant numbers of people it employs.
But the challenges we face now require all the entrepreneurial energies that the world possesses. The survey of delegates at the World Entrepreneur Summit back in March suggested that there are major opportunities in the current situation in finding new financial models, in finding solutions to the problems of environmental destruction and climate change and, of course, in providing decent working lives to the world's poorest communities which is nothing less than a human right.
Entrepreneurs, according to recent research by Delta Economics, are motivated by the desire to Make A Difference as well as other objectives like following a dream, having autonomy over time and making money. Every entrepreneur that I have ever met has thought of the change they will bring about in the first instance. Many will sacrifice everything to bring that change about and we can all recollect stories of leading entrepreneurs who have been on the verge of having homes repossessed and banks call in loans just as they strike gold.
Entrepreneurs will take risks on themselves, take innovations and turn them into dreams and generate economic, social, technological and environmental change in the process. They are the world's change agents and wherever they are, from the smallest community enterprise in sub-Saharan Africa to the largest global business, they are the people that will help us out of our current crisis. Investment in them is an investment in ours and our children's future.