Microbusiness Britain

Lead Research Organisation: University of Warwick
Department Name: Warwick Business School

Abstract

The "Micro-business Britain" project will be led by Professor Stephen Roper (ERC) and Professor Mark Hart (ERC) and managed by Katherine Hathaway. Katherine is an experience project manager and was until March 2016 a Deputy Director of ERC. Prior to working with ERC, Katherine was a Deputy Director in the Enterprise Directorate in BEIS.

Central to the project will be a large-scale survey of micro-firms (covering c. 8-10k firms) which will provide place-based data to identify specific challenges these micro-businesses face in terms of growth and raising productivity. This size of sample is necessary to ensure robust comparisons between the home nations and inform both place-based policy and national initiatives around ambition, skills, innovation, internationalisation and scale-up. It would create a baseline against which future policy actions could be measured and, through data-linking, allow place-based policy impacts to be monitored and compared. Small (c. 1.5-2k) companion surveys in the US and Ireland will provide benchmark information on ambition and growth intentions (US) and supply chains and internationalisation (Ireland). The databases created will be deposited in anonymised form in the ESRC Data Archive and will, therefore, be available for use by both the research and policy communities.

The focus of the project will be micro-employers (i.e. firms with 1-9 employees) which have been in business for more than three years. This will exclude the self-employed (with no employees) and also exclude start-ups with little trading history and which are liable to particularly high failure rates. Commercially available sampling frames will be used in each country permitting structured, random sampling. Telephone interviews will be conducted with a member of the leadership team of each firm. This approach has been used extensively by the team in previous studies and provides high quality information within a tight timeframe.

Questionnaire design is crucial to the value of this project and we will engage with BEIS colleagues and other interested parties to identify topics and metrics to include in the survey. In addition to detailed information on the enterprise and its leadership team, key areas of focus (reflecting the main concerns of the Industrial Strategy) will be:
Ambition - the strategic objectives of the firm in terms of growth, profitability, productivity etc.
Resilience - attitudes and strategies for dealing with future uncertainty
Market profile (buy side and sell side) - internationalisation, position in supply chains, public sector customers (procurement)
Performance - growth, profitability, productivity (value added per employee)
Innovation and diffusion - innovation activity (product/service, process), IP, links to science base, barriers
Training and skills - workforce, management and leadership skills
Finance - external finance - debt, equity, alternative finance; investment profile.
E-business and digital adoption - digital profile of business, ITC access and use
Eco-system factors - competition, infrastructure, business networks and policy supports (LEPs, Growth Hubs), other sources of advice

There will be two deliverables from the project by end-March 2018:
Survey databases (3) which are usable by other academics and policy analysts at local and national level;
A draft headline report (c. 20-30 pages) "Micro-business Britain" providing an overview of key insights from the UK and international benchmark survey datasets. Publication is likely to be April 2018 given standard ERC publication protocols.
Further statistical and econometric analysis will continue as part of the ERC Phase 3 research programme using the "Micro-business Britain" data and data-matching.

Planned Impact

The key beneficiaries of this project will be policy makers with an interest in the development and success of smaller firms at both local and national level. At national level this relates primarily to teams in BEIS which at the moment have very limited information on micro-businesses and particularly in areas such as the take-up of digital technologies, the barriers to such diffusion, and any information on management practices in micro-firms. These are key determinants of the productivity gap and due to the coverage of previous surveys we have little idea how these work in micro-businesses. Other aspects of the survey address other gaps in our understanding. How for example do levels of ambition in UK micro-businesses compare to those in the US where firms are generally thought to be more growth oriented? The US comparison survey will provide a robust benchmark. How well are UK small firms integrated into international or local supply chains? The Irish survey will provide some useful benchmarks here. The survey will also cover entrepreneurial and business resilience, both key issues as the UK continues in a period of significant macro-economic uncertainty.

The survey will help to complete the picture of our understanding of innovation across the population of UK firms. Innovative activity is well understood for larger firms due to the UK Innovation Survey but this only covers firms with 10 or more employees with much more limited information available for smaller firms.

The project will therefore address significant knowledge gaps in the UK and provide a robust basis for policy making in relation to digital diffusion, management and leadership practices and innovation in micro-firms. Each of these is a key theme in the development of the Industrial Strategy and on-going attempts to address the productivity gap between the UK and its international competitors. This will be important at both national and local level.
 
Description In 2017 there were 1.11m micro-businesses (with 1-9 employees) in the UK, employing around 4.09m people (17.6 per cent of the workforce). This group of firms accounted for £552bn in sales, 14.7 per cent of that by all UK firms. The Micro-business Britain Survey sheds new light on this diverse segment of the SME population in the UK and addresses important gaps in our understanding relating to innovation, technology adoption, ambition and productivity.

Understanding the UK's micro-businesses
The Micro-business Britain survey enables us to paint a distinct and vivid portrait of UK micro-businesses and their links to the households from which their owners originate. On average micro-businesses have median employment of 4.00 (mean, 3.34) and median turnover of £250,000 (mean £664,000). Around 85.6 per cent of firms reported generating a profit or surplus in the year prior to the survey. Micro-businesses in each UK region reported positive turnover growth, with growth across the UK averaging 2.8 per cent. This varied significantly both within and between regions, however, with the highest average turnover growth rate in the East of England.

On average businesses in the survey had been established for more than 22.8 years, with only 26.4 per cent either 10 years old or newer . More than half of all micro-businesses (53.8 per cent) are home-based, having the same business and residential address. 70.1 per cent of them are family-owned and 59.0 per cent were both family owned and managed. In the vast majority of micro-businesses (81.9 per cent) the founder was still involved.

34.8 per cent of micro-businesses are led by a single person, with 45.1 per cent of micro-businesses have a leadership team of two. In the remaining businesses, where there are three or more members of the leadership team, 37.2 per cent are women and 9.8 per cent from ethnic minority backgrounds.

Around a third of micro-businesses are selling to either businesses or consumers outside the UK (33.3 per cent) and, on average, micro-businesses derive around 8.7 per cent of sales from outside the UK. The proportion of firms exporting differs significantly between regions with London and the North East having the largest proportions of exporting firms (Figure 2.3).

External finance was being used by 39.4 per cent of micro-businesses on average with use highest in Northern Ireland. (46.1 per cent) and lowest in Yorkshire and Humber (32.6 per cent).

A story of ambition - for the individual, for the business
Previous studies have strongly linked owner-managers growth ambition to the subsequent growth and performance of the firm. In the Micro-business Britain survey, we use a new set of ambition questions which reflect individuals' aspirations for their own future and for the future of their business.

73.7 per cent of all respondents aim to 'keep their business similar to how it operates now', and a more ambitious 22.1 per cent of respondents aim to build a 'national or international business'. Individuals' personal ambitions suggest a rather different set of priorities, with a marked emphasis on 'freedom' and 'flexibility'

While gender differences in levels of ambition are relatively small we see larger regional differences in the proportions of micro-business owners aiming to grow their business. In terms of this metric London stands out with 35.9 per cent of business owners aiming to achieve national and/or international recognition. Levels of growth ambition among micro-businesses are markedly lower in other regions

Innovation - investments and outcomes
Across the whole sample of micro-businesses 32.4 per cent introduced a new or significantly improved product or service over the previous three years. This proportion varied significantly by region, however, from a high of 38.7 per cent in the North West to a low of 26.9 per cent in Northern Ireland. A lower proportion of firms (23.0 per cent) reported organisational changes or changes in business processes, again with strong regional variation.

10.6 per cent of micro-businesses reported new to the market innovation in products or services in the three-years prior to the survey. This varied from a high of 13.0 per cent in the West Midlands to 7.7 per cent in Northern Ireland.

Only around 1:4 micro-firms reporting innovation were actually undertaking R&D. In other words, most micro-business innovation is not linked to R&D but other types of intangible or knowledge investments. Most common among these investments were computer hardware or software (64 per cent of innovators) and advanced machinery (33.4 per cent of innovators).

Collaboration with innovation partners provides another route through which micro-businesses can access new knowledge for innovation and share costs and risks. Around 38.4 per cent of innovating micro-businesses had collaborated for innovation during the three years prior to the survey.

Adoption of digital technologies
Web-based accounting software and cloud computing are the most commonly used digital technologies among UK micro-businesses, with more than 40 per cent of firms using these technologies. E-Commerce is used by 30 per cent of firms, with 25 and 18 per cent of firms using CAD and CRM respectively. 9 per cent of firms use Machine Learning technologies, and only 3 per cent of micro-businesses are using AI.

Almost one in four firms (25.3 per cent) use no digital technology at all. Almost the same number of firms (24.7 per cent) use only one digital technology. Over one in five firms (21.3 per cent) use two digital technologies, with 17 and 8 per cent of firms using three and four digital technologies respectively.

Prior to 2012, the diffusion of digital technologies among micro-businesses was relatively low. For instance, web-based accounting software, CAD and E-Commerce were the most commonly used digital technologies, with approximately one in seven micro-businesses using these technologies in 2012. Fewer than one in ten firms were using cloud computing, and even fewer firms were using CRM, Machine Learning and AI.

Pathways to productivity
We consider how the business characteristics, innovation and adoption behaviour of micro-businesses are linked to their sales per employee, our proxy for labour productivity. Given the cross-sectional nature of our survey data there are limits to this analysis and results in terms of business characteristics and innovation should be interpreted as rather than causal relationships.

As we can establish a clear temporal difference between the date of technology adoption and current turnover per employee, however, these relationships can be regarded as causal.
Key results are as follows:
• Being a home-based business, having a larger leadership team, being an exporter and being an organisational innovator are all positively associated with significantly higher levels of sales per employee.
• Within the group of micro-businesses, larger levels of employment, being family-owned and having the founder involved are all associated with significantly lower levels of sales per employee.

Our modelling provides strong causal evidence of the impact of digital adoption on the productivity (sales per employee) of micro-businesses when productivity is measured three years after adoption:
• Use of cloud-based computing leads to an increase of 13.5 per cent in sales per employee after three or more years;
• CRM use adds 18.4 per cent to sales per employee over three years;
• E-commerce adds 7.5 per cent to sales per employee over three years;
• Web-based accounting software leads to an increase in sales per employee of 11.8 per cent over three years; and,
• Computer aided design leads to a 7.1 per cent increase in sales per employee.
Exploitation Route Further analysis of the data is planned as part of the ERC Phase 3 programme
Sectors Construction,Other

URL https://www.enterpriseresearch.ac.uk/wp-content/uploads/2018/11/ERC-ResPap72-RoperBourke.pdf
 
Description Micro-businesses (with less than 10 employees) form the bulk of the UK business population but are excluded from key official surveys such as the UK Innovation Survey. This project involved the largest survey ever undertaken of micro-businesses in the UK (around 6,000) with companion surveys in Ireland (1,500 firms) and the USA (2,000) firms. Survey data focuses on issues around innovation, adoption, resilience, ambition, supply chain participation and investment plans. Detailed data has been collected both for the firm and the business leader to reflect the home-business dimension. This survey was managed for ERC by Katherine Hathaway. Key results from the survey were featured in our State of Small Business Britain report launched at the ERC annual conference in held on 21st June, and also were the focus of a press release which received good coverage in The Times. A meeting was held to discuss the data with the Irish Ministry of the Economy. The results of the survey have been widely quoted by BEIS in a series of presentations linked to the Business Productivity Review. The survey has provided the basis for a number of follow-up activities: • A report on micro-businesses in Northern Ireland (in comparison to other UK regions and Ireland) will be published on 12th November as part of the funded contract with the Department for the Economy Northern Ireland. • A research paper focussing on the drivers of digital adoption has been completed and was presented at the ISBE Conference in Birmingham in November. This will be published in November as an ERC Research Paper. • The Micro-business Britain data was also used as part of the recent project with FSB to explore levels of ambition in less favoured regions of the UK. • The Micro-business Britain data provides the quantitative basis for a recent Aston-led proposal to ESRC focussing on productivity in micro-firms (see additional awards) • A submission based on the Irish element of the Micro-Business Britain survey led to an invitation to provide evidence to a Senate Committee in November 2018. A report focussed on micro-businesses in Ireland was published in early 2019. This report describes new and unique survey data on established micro-businesses with 1-9 employees in Ireland. The report focuses on the ambitions -business and personal-of the owners; as well as innovative activity and the uptake of digital technology within micro-businesses. In Ireland, most micro-businesses are mature, and many are home-based. They are closely related to the families which own and run them. A Story of Ambition -for the business, for the individual •An ambitious 27 per cent of micro-business in Ireland want to build a national or international business, while 71 per cent of micro-businesses emphasise the importance of keeping their business similar to how it operates now. •Over 80 per cent of micro-business owners report 'freedom to adapt my own approach to work' and 'greater flexibility for personal and family life' as key personal motivators. •Micro-businesses in the West (Galway & Galway City, Mayo & Roscommon) are amongst the most ambitious in the country. •Micro-businesses in the Border region (Cavan, Donegal, Leitrim, Monaghan, Sligo) reveal a low ambition profile. •One-third of micro-businesses in Dublin consider growth to be an important ambition. However,micro-businesses based in Dublin are not markedly more ambitious than micro-businesses across the country. •In the South-East (Carlow, Kilkenny, Wexford, Waterford & Waterford City), micro-business owners are more likely to emphasise personal rather than business ambitions. •Profiles of ambition for male and female business owners are largely similar
First Year Of Impact 2018
Impact Types Economic,Policy & public services

 
Description Productivity from Below - Understanding productivity growth in micro-businesses
Amount £890,000 (GBP)
Funding ID ES/S012788/1 
Organisation Economic and Social Research Council 
Sector Public
Country United Kingdom
Start 04/2019 
End 04/2022