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									Improving the North East’s Business Birth Rate:
       A Policy Agenda For Discussion




                 Ron Botham




                 January 2004




   Training and Employment Research Unit
             Glasgow University
1.       Introduction


This report is a follow on from, and should be read in conjunction with, a previous
study for One North East which demonstrated that the North East has, relative to the
UK‟s most dynamic and prosperous regions, a very low business birth rate and that
this is an important reason for its poor economic performance 1 . This paper takes the
need to improve the Region‟s business birth rate as given and has two aims. First, it
sets out possible explanations for the region‟s low business birth rate and, second, it
outlines a policy agenda designed to increase the business birth rate.


The paper is based on limited original research. To suggest possible explanations for
the relatively low business birth rate, it draws on:
         Research undertaken over the past decade by the author on Scotland‟s
          business birth rate. It is assumed that many of the reasons for Scotland‟s low
          business birth rate may equally explain the North East‟s problem.
         A review of the existing literature and, more specifically, research studies
          with direct relevance to the North East. A limited amo unt of material (e.g. the
          Small Business Service‟s Household Survey) was provided by One North
          East.
         The preliminary findings from an ongoing study using regression analysis to
          explain variations in the business birth rate across the UK.
         A review of new firm data provided to One North East by Trends Business
          Research.
The analysis draws heavily on the author‟s existing knowledge rather than an in-depth
study of the North East. As such, the results should be interpreted as hypotheses for
further analysis rather than empirically verified hard and fast explanations.


Turning to the second aim, the policy agenda draws on the author‟s knowledge of UK
and US experience. More specifically, it draws on Scottish practice and research
since the launch of its Business Birth Rate Strategy in 1993. To locate the agenda
within current policy in the North East, policy documents and data made available by
One North East have been reviewed and a limited number of interviews with key
players in the Region were completed. (These are listed in Annex One).


However, it should be stressed that the policy agenda is not based on an in-depth or
systematic review and assessment of current policies and activities. The study was

1
     Botham, R. and Simpson, E. (2003). The North East: An Analysis of the Dynamics of the
     Corporate Stock, Training and Employ ment Research Unit, University of Glasgow.
                                           2


not designed to undertake such a review. Furthermore, it proved very difficult to
contact and interview the key players (even by telephone) and little material was made
available outlining and evaluating current policy initiatives in the Region. In other
words, establishing what is currently being done to increase the business birth rate
proved to be far from easy and beyond the resources of this study.


Consequently, the policy agenda should not be interpreted as recommendations.
Rather, it is designed to challenge thinking and identify issues and options for further
discussion and more in-depth consideration.


2.    New Starts and New Start Employme nt


2.1   Firms and Jobs


The previous paper demonstrated that the North East has a low business birth rate and
the link between a high business birth rate and employment growth. Here data
provided by Trends Business Research, derived from the Dun and Bradstreet
database, is used to update the picture and give a „feel‟ for the nature of the North
East‟s „entrepreneurship problem‟.


All the figures relate to surviving indigenous independent new businesses (i.e. new
inward investment projects are not included). These are firms set up post-1993 and
surviving in 2003. The figures reported are those on the database. No attempt has
been made to make an allowance for the many small businesses (especially the self-
employed) not captured by the database. This means the figures quoted under-
estimate the real number of new starts. To place the North East in context,
comparisons are made with the West Midlands. While this may be seen as a regions
with some similarities with the North East, it should be noted that its business birth
rate (and economic growth) is well below those found in South East England.


As shown in Figure 2.1, the database records 13,620 independent surviving new firms
in the North East employing 69,150 people.
                                                 3


Figure 2.1:          Surviving 1994 – 03 Independent New Firms:
                           North East and West Midlands

                                   North Eas t                 Per Capita Ratio to
                                                                 West Mi dlands
                           Firms           Empl oyment      Firms          Empl oyment
Limited Co mpanies         5,692                 38,661      0.58              0.62
Partnerships               1,966                 11,072      0,.81             0.95
Sole Traders               5,960                 19,411      0.89              0.96
 Total                    13,618                 69,144      0.72              0.73



Of these, 5,700 are limited companies accounting for 55% of the jobs.                 The
partnerships and sole traders account for the rest. These are businesses set up and run
by the self- employed. While limited companies are, on average, larger and generate
more jobs, self-employment businesses also generate significant employment. Even
businesses set up by self-employed individuals (i.e. sole traders) can have employees.


To compare the North East with the West Midlands, its birth rate per capita has been
expressed as a ratio of the West Midlands per capita birth rate. A figure of one occurs
when the regions have the same per capita birth rate. A figure under one shows a
lower birth rate in the North East.


With a ratio of 0.72, the North East‟s per capita business birth rate is well below that
of the West Midlands (i.e. it is just 72% of the West Midlands‟ level). This is equally
true for employment created by new firms. With the West Midlands business birth
rate, new firms in the North East would have generated around 30% (21,000) more
jobs.


From Figure 2.1, it appears that the Region‟s problem is with limited companies.
While still below the West Midlands‟ figure, it performs better in the self-employment
sector (i.e. partnerships and sole traders). However, self-employment in the North
East remains well below the levels of South East England where much of the growth
in business services (including computing services) has been via self-employment.
                                                    4


2.2. New Firms by Gende r


The gender of the lead executive has been used to identify the „gender of new firms‟.
As shown in Figure 2.2, women set up around 19% of the surviving independent new
starts recorded on the database. On average, they are somewhat smaller than new
starts set up by men and account for 13% of new firm employment. A significant
proportion of new women‟s self-employment businesses are set up on a part-time
basis. A further 11% are set up by joint male/female teams.


Figure 2.2:        Surviving Independent New Starts by Gende r in the
                                 North East (1994 – 03)

Empl oyment                 Firms                 Jobs                Firms                 Jobs
Male                         9,149              53,035                 70.2                 74.2
Female                       2,423                9,326                18.6                 13.0
Joint                        1,462                9,062                11.2                 12.7
 Total                     13,034               71,423               100.0                 100.0
Notes: i)     The number of firms is lower than the number recorded in previous tables because it was
              not possible to identify the gender of founders in 4% of new businesses.
         ii) Women set up a higher proportion of sole traders than limited companies. Because sole
              traders are under-represented on the database, 18.6% is a small under-estimate of the real
              percentage of businesses set up by women. Ho wever, the employ ment percentage should
              not be affected greatly by this problem.
         iii) The employ ment figures are higher than in Figure 2.1 because the gender analysis includes
              a handful of relatively large local subsidiaries.


The proportion of new starts set up by women is more or less the same as in the
West Midlands. However, this means that the per capita women‟s business birth rate
is substantially below that of the West Midlands.


From other research we have undertaken, it appears that areas with high male business
birth rates have higher female business birth rates. Women face constraints over and
above those facing men. Nevertheless, similar factors affect both the male and female
business birth rates. While it is appropriate to deal explicitly with women-specific
issues (e.g. the difficulty of reconciling domestic and work responsibilities), this
relationship suggests an over-emphasis on women‟s enterprise is unlikely to be the
most effective way of improving the economic performance of the North East. An
improvement in the overall entrepreneurial environment (e.g. access to unsecured
loans) would simultaneously improve both the male and female business birth rate.
                                                 5


2.3      New Firms by Sector


Just 8% of the Region‟s surviving independent new firms are in manufacturing. A
quarter are in wholesaling/retailing and a fifth are in business services. The North
East‟s per capita business birth rates relative to that of the West Midlands by sector
are shown in Figure 2.3. Compared to the West Midlands, the business birth rate is
particularly low in manufacturing, finance and business services.                         These are
traditionally seen as sectors which drive economic development.


Figure 2.3:              New Independent Firms by Sector 2003:
                     North East Compared with the West Midlands

Sector                                 % of NE’s New Firms             Birth Rate Rel ati ve to the
                                                                            West Mi dlands
Agriculture                                     1.6                                0.70
Other Primary                                   0.1                                1.09
Manufacturing                                   8.1                                0.59
Utilit ies                                       -                                 0.87
Construction                                    8.4                                0.74
Wholesale/Retail                               26.2                                0.76
Hotel/Restaurants                              11.1                                1.02
Transport/Communications                        4.4                                0.82
Finance                                         1.8                                0.67
Business Services                              22.2                                0.58
Education                                       1.7                                0.88
Health                                          3.6                                0.84
Personal/Co mmunity Services                   10.7                                0.88
  Total                                       100.0                                0.72
Source: Calculated fro m TBR data.
Notes: i)    The Relat ive Birth Rate is calculated as New Firms per Capita in the North East divided
             by New Firms per Capita in the West Midlands.
        ii) New Firms are new independent businesses set up post-1993 and surviving in 2003.


However, the Region also has a relatively low business birth rate in more or less all
other sectors. This includes wholesale/retail, personal services, construction and
sectors relating to health and education. The only exception is hotels/restaurants
where the Region matches the business birth rate in the West Midlands.


While these figures suggest special attention may need to be given to some sectors
(and especially business services), the Region has a problem across the entire
                                                  6


economy. Whether or not the Region somehow „has enough‟ local services (as
sometimes argued) is a question for further research.


Figure 2.4:     North East Independent Ne w Starts Ranked by Top Ten
                                    Industries and Gender

Male
SIC                                        Industry                       No. of Firms
7484          Other Business Activities                                       523
5530          Restaurants                                                     515
5020          Maintenance and Repair of Motor Veh icles                       352
5248          Other Retail Sale in Specialised Stores                         331
7414          Business and Management Consultancy Services                    329
7420          Architectural and Engineering Activit ies                       258
4521          General Construction of Bu ild ing and Civ il Engineering       234
5540          Public Houses and Bars                                          202
7240          Database Activities                                             200
7220          Software Consultancy and Supply                                 197


Female                                     Industry                       No. of Firms
9302          Hairdressing and Other Beauty Treatments`                       387
5530          Restaurants                                                     223
5248          Other Retail in Specialised Stores nec                          212
5242          Retail Sales of Clothing                                        112
7484          Other Business Activities Not Elsewhere Classified              109
9304          Physical Well-Being Activit ies                                 89
7414          Business and Management Consultancy Services                    80
5540          Public houses and bars                                          74
8514          Other Hu man Health Activ ities                                 62
8042          Adult and Other Education nec                                   46



To give a feel for a more detailed industry breakdown of new starts, Figure 2.4 shows
the top 10 4-digit SICs by gender ranked by the number of new businesses. For both
men and women, local services such as retailing, restaurants/bars, car dealers (men),
construction (men) and hairdressing/beauty treatment (women) are well represented.
For men, business services and IT-related services are also important sectors.
Architecture and engineering services emerge as (perhaps an under-recognised)
                                                     7


regional specialisms. For women, health and education related services are more
apparent.


Figure 2.5:         Employme nt in Surviving Independent Ne w Firms 1993 – 03
                          by Sector: North East and West Midlands

Sector                                     % of North East New Firm           Job Creation Rel ati ve to
                                                 Empl oyment                      West Mi dlands
Agriculture                                              0.8                             0.66
Other Primary                                            0.1                             0.78
Manufacturing                                          13.3                              0.25
Utilit ies                                               -                               1.63
Construction                                             8.5                             0.94
Wholesale/Retail                                       17.6                              0.64
Hotels/Restaurants                                     14.1                              1.15
Transport and Co mmunications                            4.1                             0.72
Finance                                                  1.8                             0.55
Business Services                                      22.5                              0.73
Education                                                2.1                             0.74
Health                                                   8.0                             0.97
Personal and Co mmunity Services                         7.2                             0.84
    Total                                            100.0                               0.73



An analysis of the new firm employment (Figure 2.5) tells essentially the same story.
Most jobs are created in business services, wholesale/retail and hotels/restaurants.
Just over 13% are in manufacturing. Compared to the West Midlands, job creation is
low across all industries with the exception of hotels/restaurants 2 .


2.4      Size Distribution of New Firms


The size distribution of new independent firms by 2003 employment is shown in
Figure 2.6. Over 90% had fewer than 10 employees. Only 4.5% (i.e. 605) had over
20 employees. While business start- ups is a large numbers game, the high growth
new start market segment is relatively small.




2
     Utilit ies are also an exception. However, since almost no jobs were created in this sector, this is of
     no significance.
                                                   8


Figure 2.6:       Size Structure of Surviving Independent New Starts

                                    % of Firms                                  % of Jobs
Empl oyment             North Eas t         West Mi dlands          North Eas t       West Mi dlands
1– 9                         90.0                 90.2                  39.2                37.9
10 – 19                       5.5                 5.7                   13.5                14.3
20 – 49                       3.1                 2.9                   16.5                15.4
50+                           1.4                 1.2                   30.7                32.4



The 4.5% of businesses with over 20 employees accounts for about 50% of the jobs.
However, this means that new starts which remain small also account for 50% of the
jobs.     Furthermore, this is probably an under-estimate since the smallest new
businesses are under-represented on the database.


The average size of new starts is more or less identical in the two regions. A
marginally larger proportion of the North East‟s new starts employ over 20 than in the
West Midlands. The proportion of new starts which grow does not vary greatly across
the county. This suggests, as argued in the previous paper, that to achieve a
substantial increase in the number of growth new starts, an increase in the North
East‟s volume of new starts is a pre-requisite.


Figure 2.7:       Top Ten North East New Starts Ranked by 2003 Employme nt
                               by Gender and Line of Business

Male                                               Female
Manufacturer of Printed Circu it Boards            Outsource Call Centre
Labour for the Construction Industry               Nursing Agencies
Bespoke Timber-Framed Conservatories               Ho me Care Serv ices
Fast Food Restaurants                              Hotels
Fast Food Restaurants and Stands                   Housing Association
Bituminous Coal                                    Nursing Ho me
Casting Co mponent Wholesalers                     Care Ho me for the Elderly
Design Construction & Consultancy Engineers        Nursing Ho me
Management of Public Houses                        Co mmunity Care
Co mmercial Cleaning Contractors                   Nursery
Source: Trends Business Research
Note: i)     Listed in descending order of 2003 employ ment
        ii) Line of business is the firms own description of its activities.
                                            9


High growth new starts are found in many sectors and are not concentrated in high
tech, manufacturing or business services. The line of business of the 10 largest new
firms set up by men and women is shown in Figure 2.7. In addition to one or two
manufacturers, male high growth new starts include mining, restaurants and design
and consultancy engineers. Apart from a call centre, women‟s largest new starts are
dominated by the caring professions. It would be interesting to know whether
women‟s enterprise is better established outwith those „traditional women‟s
industries‟ in say, South East England.


3.    Explanations


3.1   Statistical Analysis


Several studies used regression techniques to explain variations across the UK in the
business birth rate during the 1980‟s. This study draws on ongoing research which
uses similar techniques to explain variations between UK counties in the business
birth rate for the period 1995 – 2000. Potential explanatory variables were drawn
from both previous studies and the entrepreneurship literature.
The Region‟s low business birth rate reflects a wide range of, often inter-related,
factors. It is not possible to provide a simple, clear cut explanation. This is because
many of the explanatory variables are inter-related. Consequently, it is possible to
generate several equally „good‟ (defined statistically) models. Each includes a
different range of variables.


To overcome this problem, data for each of the explanatory variables which emerge as
statistically significant in at least one version of our multiple regression analysis are
presented in Figure 3.1. This shows for each of the Region‟s four counties
(Cleveland, Durham, Northumberland and Tyne and Wear) the variables „z score‟.
This measures the area‟s standard deviation from the UK mean. For example, taking
the business stock per capita, Cleveland is 1.97 standard deviations below the GB
average. In contrast, it has an above average percentage of its population in the age
group 25 – 44 (i.e. a z score of 0.21)


Figure 3.1 also shows the single variable regression equation linking the variable to
the business birth rate. This gives an initial impression of its possible significance as
an explanation of the Region‟s low business birth rate.


.
                                                                                                   10



Figure 3.1:                                                            Regression Analyses: Explanatory Variables

NE COUNTIES Z-S CORES                                                                            Z S cores                                         Regression Results

                                                            Cleveland                Durham                 Northumberland   Tyne and Wear     b                        r2

VAT Stock per 10,000 Pop. 1995;                                -1.93                  -1.43                     -0.53            -1.94        0.39                  0.34

% of Pop. or Workforce with Degree Plus;                       -1.37                  -1.08                     -0.42            -0.94        0.39                  0.65

% of Pop. Aged 25 - 44;                                        0.21                    0.04                     -0.42            0.21        15.01                  0.24
Higher Education Students per 10,000 Pop.;                     0.06                    0.25                     -1.45            1.39         0.00                  0.00

University Research Income per Capita;                         -0.58                   0.02                     -0.61            0.33         1.08                  0.08

Gross Disposable Household Income Per Capita;                  -1.23                  -1.23                     -1.30            -1.25        0.05                  0.65

% Pop. Change 1995 - 00;                                       -1.43                  -1.14                     -0.36            -2.17       15.38                  0.47

GDP per Capita;                                                0.91                    0.91                     -1.24            -0.73        0.02                  0.41
% Home Ownership (Total);                                      -0.24                  -0.67                     -0.70            -1.90        2.80                  0.91

% Public Sector Employees;                                     0.74                    0.05                     -0.38            1.67        -6.05                  0.23

Mining and Industrial Area;                                    1.53                    1.69                      3.10            0.09        -6.91                  0.28

Inward Investment Projects per 1 M illion Pop.                 0.54                    1.80                      0.90            0.50         0.16                  0.02

Corporate Structure                                            0.87                   -0.37                     -0.59            0.97         0.01                  0.17

VAT registrations per 10k Population                           -1.80                  -1.40                     -1.08            -1.58


Rows in bold italics are statistically significant as independent variables in linear regression analyses
                                         11


3.2   Demand


It is sometimes argued that the small size of the regional economy somehow accounts
for the Region‟s low business birth rate. Essentially, this is an argument which sees
the level of, and changes in, demand as the main determinants of the business birth
rate. Taken to its extreme, it is sometimes argued that with fixed regional demand, an
increase in the business birth rate simply represents a 100% displacement of other
economic activity in the Region. Consequently, generating demand via other policies
(e.g. attraction of inward investment, increased government spending) is seen as
essential. An increase in demand is then assumed, more or less automatically, to
bring about an increase in the business birth rate.


Figure 3.2:     The Business Birth Rate and Gross Disposable Household Income
                                    Per Capita


Y=-268.9+0.05X, R 2 =0.65
         400




         300




         200




         100




           0
           700 0            800 0             900 0           100 00            110 00


               Disposable Household Income


However, regression studies explaining variations in the business birth rate across
both the UK and US show that demand accounts for only a small part of the variation
in the birth rate. During the 1980‟s, the North East of Scotland was one of the UK‟s
fastest growing areas because of North Sea Oil. While the business birth rate
increased marginally, it remained below the UK average. This evidence suggests that
                                              12


increasing aggregate demand is unlikely (on its own) to have a major long term
impact on the Region‟s business birth rate.


Nevertheless, there is a relationship between the business birth rate and t he level of
household income and changes in population. Change in population is used as a
proxy for changes in consumer demand. These relationships are shown in Figures 3.2
and 3.3. As in subsequent graphs, the four North East counties are identified as
squares. On both measures, all four counties are well below the GB average.
Consequently, demand is one of the factors which inhibits the region‟s business birth
rate. However, as in previous studies, within the multiple regression models (i.e.
taking into account other variables), it accounts for a relatively small part of the
region‟s problem.


Figure 3.3:         The Business Birth Rate and % Population Change 1995 - 00


Y=150.12+15.38X, R 2 =0.47
         400




         300




         200




         100




           0
               -4            -2           0           2             4             6


                POPCH%


Furthermore, it is not self-evident how aggregate demand can be increased in such a
way that it encourages entrepreneurship. Inward investment or increased government
expenditure (in say, health and education) has not, historically, generated increased
                                          13


levels of entrepreneurship. For example, there is no statistical relationship between
inward investment projects and an area‟s business birth rate.


To the extent that demand matters, its nature rather than level may be the crucial
factor. In this context, it could be worth examining whether public procurement
procedures encourage or discourage entrepreneurship. It could be, for example, that
selection criteria applied to potential suppliers make it difficult for new or young
firms to win orders. Similarly, private sector organisations may be reluctant to place
orders with young, often unproven, suppliers.


In the US, the Small Business Administration (SBA) has run programmes over many
years designed to enable SMEs access both government procurement and large
company demand. For example, it operates a large, national insurance scheme for
organisations purchasing from SMEs. This minimises the risk of placing orders with
new and small firms should they fail to deliver.


The SBIR is a specific example of a programme which enables new and small firms
access public sector procurement of R&D. This has done much to enable the
development of „high tech‟ SMEs based on procurement from inter alia, the Health
Service, Department of Defence, NASA, Department of the Environment and even
the US equivalent to the UK‟s Research Council.


A variant on the demand theme is that the Region‟s business birth rate is low because
of its peripherality. New firms generally start up on the basis of serving local
customers. Improved access to other parts of the UK is highly unlikely to generate
new firms. To the extent that it has an influence, peripherality is more likely to
constrain post-start-up growth. While peripherality may be an issue for overall
economic development, it is difficult to envisage how it constrains entrepreneurship.


3.2   Economic Structure and Supply-Side Factors


3.2.1 The Effects of History


The influence of history is long lasting. It remains the case that areas in which mining
and metal industries were heavily represented have low business birth rates. These
industries did not require, or create, a small firm, entrepreneurial culture. With the
exception of Tyne and Wear, the former dependence of the other three counties on
                                               14


these industries is a significant reason for their low business birth rate. Unfortunately,
policy is unable to change history.


3.2.2 Industrial Structure


The Region‟s industrial history continues to influence its industrial and business
structure. Across the UK, there is a weak, but positive, relationship between a
favourable industrial structure and the business birth rate. In other words, areas with a
disproportionate number of firms in growth sectors tend to have marginally higher
business birth rates. However, others have shown that the North East‟s low business
birth rate is not because it has an unfavourable industrial structure 3 .


This is confirmed in Figure 3.3. Both Cleveland and Tyne and Wear have favourable
industrial structures. Overall, the Region‟s industrial structure is more or less neutral.
The Region‟s business birth rate is substantially lower than would be expected given
its industrial structure.


However, there are other aspects of industrial and corporate structure which do have
an adverse effect. Figure 3.4 shows the relationship between public sector
employment and the business birth rate.             Areas with a high proportion of the
workforce in the public sector generally have lower business birth rates. Public sector
worker generally do not become entrepreneurs and the Region (with the exception of
Northumberland) has an above average percent of public sector employment. This
contributes to the overall explanation.


It is, however, clear from Figure 3.4 that several other areas have a greater proportion
of their workforce in the public sector and have higher business birth rates than the
Region‟s four counties. Also, if the measure is public sector employees per resident,
many counties in the UK have more public sector jobs than all four North East
counties. This implies that the high percentage of employment in the public sector is
not because there is „over much‟ public sector employment but rather because
employment in other sectors is relatively low.




3
    Johnson, P. (2001). Targeting New Firm Births and Economic Regeneration in a Lagging Region:
    The Case of the North East of England, Barclay Centre for Entrepreneurship, Durham Business
    School.
                                           15


Figure 3.4:         The Business Birth Rate and % Public Sector Employme nt


Y=314.28-6.05x, R 2 =0.231
         400




         300




         200




         100




           0
               10                     20                    30                      40


                public sector emp % of lfs employees


However, the most important structural factor is that all four counties have a below
average number of businesses per head of population (i.e. a low corporate stock). As
illustrated in Figure 3.5, there is a positive relationship between an area‟s corporate
stock and its business birth rate. Areas with many businesses per capita generate
more business start-ups. This is consistent with well-established research findings
that individuals from an entrepreneurial family and/or who work in SMEs are more
likely to set up in business than individuals without such a background.


The Region‟s small corporate stock is an important reason for its low business birth
rate. The low corporate stock is, itself, a product of history and the region‟s continued
dependence on relatively large branch plant. With a low business birth rate over at
least the past 20 years, inevitably the region has a small corporate stock.
                                           16


Figure 3.5:          The Business Birth Rate and the Business Stock
                                    per 10,000 Pop.


Y=59.778+0.386x, r2 =0.34
         400




         300




         200




         100




           0
              100             200               300               400               500


               1995 stock per 10k pop


However, the other side of the coin is that success in increasing the business birth rate
will have cumulative beneficial effects. An increase in the birth rate increases the
business stock, more individuals will come from an entrepreneurial family and/or
know an entrepreneur and/or work in an SME. Consequently, there will be a further
increase in the business birth rate.


3.3   Finance


Access to finance is one of the major constraints identified by the majority of „would
be‟ entrepreneurs and this was one of the six key themes in Scotland‟s Business Birth
Rate Strategy. Given that finance is a pre-requisite for most business formation, this
is not surprising.    However, whether there is market failure remains subject to
ongoing debate. This is discussed further in Section Five.
                                           17


One reason why the question is subject to ongoing debate is the difficulty of
measuring access to finance. There is no direct evidence, for example, on whether
access to finance varies across the country or whether it is more of a problem for
North East „would be‟ entrepreneurs compared to „would be‟ entrepreneurs living
elsewhere in the UK.


However, the two main sources of start- up finance are personal savings and banks.
With low income in the North East, it may be that access to personal savings is lower
than in, say, South East England. Access to bank finance has historically depended
upon, inter alia, the ability of the „would be‟ entrepreneur to provide matching funds
(i.e. the gearing ratio criteria) and security. An important source of security is the
home. Consequently, it can be argued that home ownership is an important means of
accessing finance.


Regression studies have been unable to measure access to finance directly.
Consequently, home ownership has been used as a proxy. In the 1980‟s studies, home
ownership was one of the most powerful explanatory variables. As illustrated in
Figure 3.6, there is still a statistically significant relationship between home
ownership and the business birth rate. Furthermore, as illustrated by the „z score‟,
home ownership is below average in all four counties. This implies that access to
finance is more problematic than in many parts of the UK and partly explains the
Region‟s low business birth rate.


However, compared to the earlier studies, home ownership is now a less powerful
explanatory variable. Indeed, it loses its statistical significance in several versions of
the multi- variate model. Whether this reflects the fact that access to finance is less of
a constraint or because home ownership is now a less good indicator of access to
finance is not self-evident.


While it is a question requiring further research, our suspicion is that access to finance
continues to vary across the country (and is low in the North East) but that home
ownership is a less good proxy for access to finance. This is because the increase in
home ownership in the North East is relatively recent. At least some of it is
„privatisation‟ of council housing. In combination, this may mean there is limited
„free‟ equity in the home and, consequently, it offers less security to potential lenders
(i.e. the banks).
                                          18


Figure 3.6:         The Business Birth Rate and % Home Owne rship


Y=18.13+2.80X, R 2 =0.193
         400




         300




         200




         100




           0
               40               50             60                70               80


                Homeowners (%)


3.4   Human Resources


3.4.1 Population


It is people (either individually or as teams) who set up businesses. As such, they are
the key resource. Also, in contrast to history and the industrial structure, they are
subject to influence and change. Consequently, the nature of the regional population
is both a significant factor in explaining the Region‟s low business birth rate and
should be the main policy focus.


The probability of setting up a business is correlated with age. It is low for the
youngest and oldest age groups within the adult population. It is highest for the core
labour market age group of around 34 – 45. Reflecting this, areas with an above
average proportion of the population in the 25 – 44 age group have higher than
average business birth rates.
                                           19


With the exception of Northumberland, the Regions‟ three counties have a favourable
population age structure. Leaving aside other factors, on the basis of its population
age structure, the North East should have a relatively high business birth rate. This is
one of the few favourable structural factors in the Region.


In- migrants are significantly more likely to set up their own business than the local
populace. Not surprisingly, therefore, regions which attract in-migrants have above
average business birth rates. The relative absence of in- migrants reduces the
entrepreneurial potential of the North East.


This provides an illustration of the cumulative (and inter-related) nature of the
entrepreneurial and economic development process.         In- migrants are attracted to
economically successful regions. This, in turn, increases entrepreneurial potential and
enables the region to become even more successful. Policies and mechanisms to
attract and enable people to move into the region could, in the longer term, make a
useful contribution to the creation of a more entrepreneurial society.


3.4.2 Education


At least in the UK, increased levels of education increases both interest in
entrepreneurship and the ability of individuals to convert their interest into action.
Consequently, individuals with at least a degree are substantially more likely to
become self-employed/set up a business than individuals without a degree level
qualification.


This is reflected in Figure 3.7 which shows the relationship; between the business
birth rate and the proportion of the workforce with a degree. As can be seen, all four
of the Region‟s counties are towards the bottom end of the „degree plus‟ league table.
At the same time, it also shows that the Region has a lower business birth rate than
would be expected given the proportion of the workforce with at least a degree (i.e.
graduates are less likely to set up their own business in the North East than elsewhere
in the UK).
                                           20


Figure 3.7:            The Business Birth Rate and the % of Pop.
                                 with a Degree Plus


Y=46.37+0.386X, R 2 =0.655
         400




         300




         200




         100




            0
                2        4          6           8          10         12          14


                Degree or Above (% of 1991 Population)


An increase in the number of graduates in the Region should increase the business
birth rate. However, some caution is required. There is no relationship between the
number of students and the business birth rate. Simply attracting more students to the
North East‟s Universities will not improve the business birth rate. This is because the
vast majority of graduates set up their own business following experience as an
employee.


This re-emphasises the need to get more graduates working in the Region (and not
simply an increase in the numbers coming out of the Universities). It also reinforces
the need to attract graduate in- migrants and confirms the potential role of the
Region‟s various graduate enterprise programmes. However, equally relevant are
programmes which enable SMEs recruit (both local and non- local) graduates.


A graduate recruitment/training         subsidy (perhaps targeted    at science and
technologists, IT specialists etc.) would benefit the graduate, encourage more SMEs
                                          21


to employ qualified manpower and, in the longer term, increase the business birth
rate. Exposure to SME working practices is an important part of the entrepreneurship
training process.


3.4.3 ‘Would Be’ Entrepreneurs


Relatively few people in the North East are self-employed or run their own company.
Furthermore, the number of „would be‟ entrepreneurs (i.e. individuals interested in
setting up their own business) is, according to the SBS Household Survey of
Entrepreneurship, well below the English average. At 8% of the adult population, it is
the lowest of all English regions (and also lower than in Scotland).


In Scotland, the strategic focus was on converting existing entrepreneurial interest
into action. This was because there was a large pre-existing pool of „would be‟
entrepreneurs. While 8% of the adult population is relatively low, this still represents
a substantial pool of „would be‟ entrepreneurs in the North East. Policies designed to
encourage and enable „would be‟ entrepreneurs to convert their interest into actual
businesses are required.


However, the relative shortage of „would be‟ entrepreneurs is one of the explanations
for the North East‟s low business birth rate. Consequently, policies are required to
increase awareness and interest in the business start- up option. Many of the reasons
for the limited interest have already been suggested.           These include family
background, knowing an entrepreneur, work experience in an SME and education.
All of these, relative to other parts of England, work against the North East.


The SBS Household Survey of Entrepreneurship does not provide the range of in-
depth analysis which underpins the Scottish Business Birth Rate Strategy. However,
if North East attitudes and perspectives are similar to those in Scotland, it seems
likely that it is a less encouraging and entrepreneurial society than Southern England.
For example, the contribution of entrepreneurs to society and job creation are
probably inadequately recognised while government and the public sector (rather than
entrepreneurs) are seen as having the main responsibility for job generation.


As a specific illustration, in Southern England entrepreneurs are second in a list of
„occupations‟ ranked on the basis of their contribution to society. In contrast, in
Scotland they are ranked towards the bottom of the league table. They are ranked
below, for example, bus drivers and plumbers. The differences between regions are
                                          22


subtle and difficult to measure. Nevertheless, they are real and probably affect
interest in entrepreneurship and the willingness to take the risk of setting up in
business. Why do it if it is not encouraged or appreciated by society?


3.4.4 Culture


Within the Region, the low business birth rate is generally explained by the generic
argument that it is the North East‟s culture. This term is used to summarise many of
the factors discussed in the preceding paragraphs.


The North East‟s culture may, indeed, be a major factor. However, using culture as a
glib, overarching explanation poses problems. The standard policy recommendation
is the need for cultural change. Since this is difficult and usually seen as somebody
else‟s job, the need for prior cultural change becomes an excuse for doing nothing.


From a policy perspective, better understanding and a more specific definition of the
factors which make for an entrepreneurial culture are essential. Similarly, research is
required on how these factors can be influenced. For the North East, the most
important specific questions which should be addressed are what creates a „would be‟
entrepreneur and how can policy increase their number?


As already illustrated, some of the factors creating „would be‟ entrepreneurs (e.g.
family, knowing an entrepreneur, work experience) are known. The majority are
relatively young but with many appearing to lose their interest during early adult life.
On the other hand, there is minimal knowledge or research on many of the critical
policy questions. For example, it is not known how many people develop or can
develop an interest later in life and how such an interest can be developed. Similarly,
having generated interest early in life (e.g. via education), how can this be maintained
into the future? While knowing an entrepreneur is known to make a difference, how
well is it necessary to know them? How influential is the press? What type of role
models are effective etc?


Based on the Scottish Household Surveys, it is clear that many of those who say they
are not „would be‟ entrepreneurs have never been exposed to the idea and have never
before even considered the possiblity.     Furthermore, many (including graduates)
believe they could not run their own business and do not have the necessary skills.
Large numbers of individuals simply know little about the basic „nuts and bolts‟ and
                                          23


have little idea of where to start. It is very difficult to have an interest in self-
employment without some basic skills and understanding.


These points are stressed because it is much easier to deal with these specific issues
rather than aiming to change the culture. Tackling these issues will, over time,
change culture. In other words, cultural change should not be seen as a pre-requisite.
Rather, culture is the outcome of specific actions often addressing more mundane
day-to-day practical problems.


The Scottish experience can, again, be used to make one final, but important, point on
culture as an explanation. Generally, it is assumed that an anti-entrepreneurial culture
is found amongst the populace. However, in Scotland, the populace (including the
majority of Labour voters and none „would be‟ entrepreneurs) were not anti-
entrepreneurial. In contrast, the most anti-entrepreneurial attitudes and perspectives
were found in Scotland‟s opinion forming and influential institutions.


These institutions included education, media, the church, government, industry and
even business support and economic development agencies. While change is
underway, problems persist. For example, University education is still public sector
and large company orientated. They have done little to embed entrepreneurship into
the curricula. In contrast to many US industry associations, few similar bodies in the
UK actively encourage and assist new firm market entry. Government continues to
highlight business failure and concerns about displacement.              Finally, while
development agencies have recently adopted entrepreneurship strategies, many parts
of these organisations are less than committed. For example, entrepreneurship rarely
appears as a critical issue in strategies for clusters such as IT/software, chemicals or
environmental industries. Almost all successful clusters require a steady stream of
new market entrants. Generally, strategies reflect the interest of established business
and fail to recognise the importance of new firm formation.


While these examples may suggest that institutional cultures are not seriously
constraining entrepreneurship, they do not positively encourage and support it. In
comparison with the US, where there is much positive institutional support and
encouragement, its relative absence may be one of the main cultural factors
contributing to the North East‟s low business birth rate. Strategy needs to at least
address this possibility.
                                           24


4.    Policy Design


4.1   The Need to Do More


A probable response to much of the policy agenda outlined below is that „we are
already doing it‟. Indeed, many initiatives and projects are underway in the region.
However, our impression is that many are recent, small scale, under- funded and short
term. Given the region‟s low business birth rate, current policies and initiatives are
self-evidently not sufficient.


Furthermore as illustrated in the previous section, the North East‟s problem reflects
many structural factors and is deep-seated. Improvements will not be achieved easily.
This is confirmed by the Scottish experience. Bringing the region‟s business birth
rate more into line with the UK average will require long term commitment and
substantial resources (both manpower and financial). In Scotland, the Business Birth
Rate Strategy has been allocated around £16m per year. Given that the birth rate
remains low, this is self-evidently not sufficient. It also suggests that, despite the
rhetoric and high profile, entrepreneurship has not been a real priority. Much more
resource continues to be devoted inward investment. To bring real change and
demonstrate serious commitment, the North East needs to „think big‟. This might
mean a level of resource devoted to creating an entrepreneurial society matching those
historically used to attract inward investment.


It will not be sufficient for the region to match the efforts being made in other regions.
The „problem‟ is more deep-seated and severe than in much of the UK. The region
needs to do more than in other regions. Equally, it needs to lead policy innovation
rather than simply follow other regions (or adopt UK policies).


In doing so, two issues require explicit attention. First, almost all the North East‟s
entrepreneurship programmes are supported by EU fina nce rather than from core
budgets. Consequently, much activity is shaped by EU criteria rather than what is
required to create a more entrepreneurial culture. This reliance on EU money imposes
constraints on the North East‟s strategy. For example, access to Social Fund money is
a partial explanation for the Region‟s focus on entrepreneurship and social inclusion.
Much EU money is also short term making it difficult to create a „permanent‟ start-up
support infrastructure. Furthermore, in the not too distant future, it will be necessary
to find ways of replacing EU money. How this is to be achieved requires careful and
immediate consideration.
                                           25


The second issue relates to the size, longevity and nature of initiatives and policies
used to encourage and support entrepreneurship. The region has many small
fragmented projects, services and initiatives. In the US, in contrast, there are a limited
number of large, long established programmes. These have had time to develop
efficient and effective service delivery mechanisms and benefit from economies of
scale. They require many fewer people to administer and implement than is typical in
the North East.


In the context of reduced EU money, the introduction of a few large scale activities
and programmes could be worth further consideration. Implementing a few „big
things‟ may be a more effective means of creating an entrepreneurial society rather
than the current proliferation of small scale projects. It should be noted that this does
not imply either standardisation across the region or centralised delivery. The US
programmes illustrate how large national programmes can be delivered and
customised locally without imposing substantial administrative and resource
overheads.


4.2   Social Inclusion


Business start- up policies have a long history of targeting the unemployed and
socially excluded. For example, the Enterprise Allowance Scheme provided financial
support to enable the unemployed set up their own business while many of the
Enterprise Agencies have their origin in efforts to reduce unemployment. Much
current activity in the North East continues to target disadvantaged areas, the socially
excluded and minority groups. Even Business Links is giving priority to
disadvantaged areas and social enterprise. Indeed, our interviews left the strong
impression that support for new starts is often more about social inclusion than
economic development.


Social inclusion and specific groups such as women and ethnic minorities are, self-
evidently, legitimate policy concerns. Given that different groups require different
forms of encouragement and support, market segmentation is essential. Targeting
specific areas and groups also simultaneously contributes to social inclusion, the
business birth rate and economic development. However, an undue emphasis on the
disadvantaged and social enterprise within an entrepreneurship strategy is not the
most effective means of increasing the business birth rate or the rate of economic
development and job creation.
                                            26


The North East has a low business birth rate across the entire economy and not just
within disadvantaged areas or minority groups. From an economic development
perspective, it may be more effective to target the „mainstream‟ pool of potential
entrepreneurs rather than those groups which are least likely to set up a business and
require most resources. Furthermore, businesses set up by the most disadvantaged
(and women) are less likely to achieve significant growth.


Similarly, it seems highly unlikely that social enterprise will make a substantive
contribution to transforming the North East‟s economy and closing the North-South
Divide. Setting up and running a successful „normal‟ commercial enterprise is far
from easy. Setting up and ensuring the survival of a social enterprise with a more
complex set of management objectives is at least equally, if not more, difficult. It is
not, therefore, self-evident why this form of business is seen as most appropriate for
the disadvantaged and socially excluded. While there are a few highly successful
social enterprises, many years of financial support in Scotland has resulted in very
few sustainable businesses.


An over-emphasis on the disadvantaged and social enterprise may also have subtle
„cultural‟ effects. Several of the most strident academic critiques of entrepreneurship
come from the North East. In part, this is because of the policy focus on those least
likely to be successful, most likely to suffer a form of self-exploitation and least likely
to be in a position to deal with the risks and consequences of failure. Such critiques
undermine support for the creation of an entrepreneurial culture.


Furthermore, an emphasis on the disadvantaged and social enterprise gives
inappropriate signals to potential mainstream entrepreneurs. The region needs its
brightest and best with most resources to become more entrepreneurial. However, an
emphasis on the disadvantaged suggests that setting up a business is an option of last
resort for those with few alternatives. It is also possible that business support
organisations focusing on disadvantaged areas and the socially excluded are unlikely
to attract better qualified and more affluent potential entrepreneurs.


A focus on specific minority groups is unlikely to be successful in the absence of
policies which create a more entrepreneurial society for everybody. For example,
regions with high rates of male self- employment have relatively high rates of female
self-employment. This suggests that both respond to similar stimuli and co nstraints.
We are not aware of regions with low male entrepreneurship and high female
entrepreneurship. Consequently, a focus on „women‟s issues‟ without addressing the
                                           27


overall entrepreneurial environment is unlikely to be successful either in raising the
female rate of business start-up or regional economic growth.


One of One North East‟s objectives is to create a more entrepreneurial culture. An
entrepreneurial culture has many components and is not readily defined. However, it
should be recognised that the values which underpin commercial and social enterprise
are not identical. It cannot be assumed that the messages required to sell social
enterprise will simultaneously encourage and stimulate commercial entrepreneurship.
At the very least, care is required to reconcile the differing perspectives and to ensure
that social enterprise and enterprise for the disadvantaged does not swamp the
mainstream message.


Questions should also be raised as to whether promoting business start- ups for the
disadvantaged is the most effective means of achieving social inclusion (e.g.
participation in the labour market and employment). Setting up a business will
always be an option for a tiny minority of the most disadvantaged. For the majority,
policies to create jobs locally and to get them into employment may be more
appropriate. For disadvantaged areas, support for normal commercial enterprise
rather than social enterprise might be more effective and beneficial. This might
generate more jobs. Equally important, the areas may be disadvantaged because of
the absence of commercial business. An undue emphasis on social enterprise may
continue to stigmatise areas and more or less permanently exclude them from the
mainstream economy. Finally, care is required not to „push‟ groups (e.g. ethnic
minorities) into social enterprise where mainstream commercial enterprise is both
possible and appropriate.


None of this is, of course, to argue that policy should not support start- ups by the
unemployed, pushed entrepreneurs, the disadvantaged or minority groups. Highly
successful new businesses emerge from all sectors of society including the
disadvantaged. It is, however, to argue that targeting these groups at the expense of
mainstream entrepreneurship is not the most effective route to economic
development. Entrepreneurship is for everybody, not just the poor or excluded.


4.3   A Selective or Universal Service


There is a debate over whether start- up support should be selective or should be
available to more or less all start-ups. This is reflected in policies which target high
growth new starts. However, selectivity also exists in many services which, for
                                            28


example, offer support to new businesses, manufacturing or tourism. In contrast,
available support may exclude retailing and personal services. Our interviewees also
suggested that business and professional service start-ups are not necessarily eligible
for assistance. This despite the fact that the Region‟s business birth rate is particularly
low in such services.


The case for selective assistance is based on linking business support to economic
development. Selection criteria are generally derived from assumptions about which
businesses contribute most to economic development. In turn, this is derived from
assumptions about the probable level of displacement. For example, because they
serve the local market, retail businesses are assumed to more or less completely
displace other local retailers. Selectivity may also reflect funding sources and the
shortages of resources. With limited resources, it is argued that services must target
start-ups with the largest impact.


The SBA‟s SCORE programme in the US offers an alternative model and philosophy.
More or less all start-ups are eligible. Judgements are not made at the level of the
individual business. The service is based on the argument that entrepreneurship
across the entire economy makes a critical contribution to economic development.
Consequently, the link between support and economic development is made at the
strategic level rather than through day-to-day selection of „worthy‟ new starts.
Consequently, all new starts, rather than just a selected few, are valued.


In designing a support network, policy has a choice over whether the aim is to create a
selective or universal service. The culture, philosophy, operating procedures and
knowledge base of a service delivery organisation are very different to those normally
associated with an economic development agency. Specifying selection criteria is
problematic. For example, in some circumstances retail businesses can be key players
in economic development (e.g. in tourism or as a means of developing HQ functions).
Almost all of Scotland‟s most successful recent entrepreneurs (some of whom now
put back a considerable amount into supporting entrepreneurship) would have been
excluded by the traditional „economic development‟ criteria. Finally, selection, by
implication, says to many „would be‟ and actual entrepreneurs that their business does
not matter.


To increase the business birth rate, it can be argued that the aim should be to stimulate
entrepreneurship throughout the economy and provide at least a basic support service
for all „would be‟ entrepreneurs who wish to use it. This requires more cost effect ive
                                            29


delivery. However, this does not exclude the option of providing additional targeted
services for specific market segments (e.g. Graduate Enterprise, high growth new
starts).


4.4   Volume Versus Growth Companies


A specific example of the selectivity debate is a policy targeting high growth new
starts. However, as illustrated in the previous paper, getting more high growth new
starts almost certainly depends on an overall increase in the business birth rate.
Consequently, volume and high growth are not inconsistent options. Rather, they are
mutually inter-dependent but with an increase in the volume of new starts being more
or less a pre-requisite.


Nevertheless, achieving rapid and substantial growth is risky and businesses can
benefit from targeted assistance to help them realise their growth potential. The
Region does not have a dedicated high growth new start programme. New starts
which have demonstrated potential are (at least in theory) referred to programmes
such as Alchemists which deals with all (but mainly existing) high growth businesses.
While this began as a high growth new start programme, it became largely focused on
existing businesses.       To create, rather than simply pick, high growth start- ups,
assistance is required pre-start. Consequently, consideration should be given to
whether this is an effective arrangement or whether a more specialised high growth
new start programme is required.


5.    A Policy Agenda


5.1   Awareness and Stimulating Action


The level of interest in setting up a business is low in the North East relative to other
regions. Nevertheless, there is still a substantial number who are interested in self-
employment and business formation. Consequently, policies are required both to
increase awareness and to stimulate those who already have an interest to take action.
It is these policies rather than the provision of start- up support services which will
increase the business birth rate.


At least two Personal Enterprise Shows have been run in the Region. Based on the
Scottish experience, these can bring forward large numbers of new starts. However,
the impact of Shows is variable depending on inter alia:
                                             30


          The location of the event and the extent and quality of pre-event marketing.
          The ease with which attendees can sign up with service providers (e.g. EAs,
           banks) at the Show.
          The nature and quality of „follow-up‟. A telephone call to attendees is more
           effective than a letter.
          The availability of post-Show events such as training courses.
          Participation and commitment of local service providers such as Enterprise
           Agencies and the Prince‟s Business Trust.
The limited number of interviews undertaken for this study suggested that post-Show
follow-up and service delivery was far from optimal.


To be effective, a systematic ongoing campaign is required (i.e. not one-off
occasional events). In addition to a few high profile events, this should include a
large number of regular local events. These can target specific market segments. For
example, these could include events for younger people (perhaps held at FE/HE
venues), the creative industries or women. The Scottish experience shows these
should be planned well in advance and not as short term initiatives to meet start-up
targets.


Clear „marketing messages‟ are required to underpin any campaign. The purpose is to
„sell‟ the idea of setting up a business. This should not be confused with either
marketing specific events (such as Enterprise Shows) or marketing and publicising the
public sector (e.g. the Government or One North East). To take the risk of setting up
a business, individuals may need to know, for example, that it is possible, not as
personally risky as perhaps they think, that it is important (e.g. it is entrepreneurs and
not government which create jobs for others), that they will gain respect (rather than
being resented as exploiting the workforce) etc. etc.


While clarity is required, this does not mean a single, one-dimensional message.
Business founders are heterogeneous and driven by different motives. For example,
the messages which might encourage science and technologists are different to those
which stimulate the vast majority of business founders. Similarly, the messages
relevant to men and women may be somewhat different. For example, more women
than men see setting up a business as a good means of reconciling or balancing family
and work responsibilities.
The treatment of „failure‟ requires explicit and careful consideration when designing
the message. The fear of, and stigma attached to, „business failure‟ are generally
recognised as serious constraints. However, an over-emphasis on the issue and a
                                          31


focus on reducing failure rates by the public sector may reinforce the problem. Even
the continuous use of the term „the business failure rate‟ reinfo rces the problem. A
more appropriate approach may be to recognise that many new businesses close (for
many different and acceptable reasons), few entrepreneurs have serious debts or lose
their homes and „having a go‟ can be beneficial in terms of subseque nt employment
opportunities.


For many, it is difficult to express an interest in setting up a business without some
basic idea of how and where to start. Historically, very few people have been made
aware of the „nuts and bolts‟ of setting up a business through the education or training
system. Without this knowledge, it is even difficult to approach the business support
network. Consequently, a marketing campaign needs to target not only attitudes and
culture but also to include basic information on how to set up a business. This might
be achieved, for example, via role models and case studies.


A systematic review of local and regional press coverage of entrepreneurship and
whether and how it might be improved could be worthy of further consideration as a
means of disseminating both the message and „know-how‟. This needs to include
both the mainstream press and more specialist business and industry publications. It
is not sufficient to rely on newsletters from business support agencies (which tend to
market themselves rather than entrepreneurship).


5.2   Advice and Counselling


5.2.1 The Role of Support Agencies


There are several long established Enterprise Agencies in the North East offering
start-up training, advice and consulting.      Business Links has also become more
involved in this market as a funder of services largely delivered via the EAs. Much
time and effort is being devoted to the creation of a regional support network, in part,
designed to reduce duplication and client confusion. The support network will be
based on a „brokerage‟ model. However, whether this should, and will, be applied to
the start-up market is still under discussion. Other developments are also underway
such as Project North East‟s extended opening hours, offering increased accessibility.
An effective system for providing „would be‟ entrepreneurs with training, advice and
counselling is important. Policies to raise awareness and stimulate action, generate
additional demand for advice and counselling. Many „would be‟ entrepreneurs simply
                                            32


want somebody to talk to. The Small Business Administration (SBA) in the US
operates an extensive programme of start-up advice and counselling through SCORE.


However, simply putting in place an efficient, neat and tidy network of support
agencies and services will not substantially increase the business birth rate. Support
services are largely reactive. They deal with „would be‟ entrepreneurs who have
already decided to have a go. While they enable some individuals get through the
start-up process who would not have otherwise „made it‟, the evidence is that start-up
advice and counselling has most impact on survival rates. While important, on their
own business support services are not sufficient.


Furthermore, recent policy developments may be doing little to improve the business
birth rate. The time and effort devoted to reducing duplication (and, therefore it is
assumed, client confusion) may save a small amount of money but it is unlikely to
increase the business birth rate substantially. Few „would be‟ entrepreneurs are likely
to say „good, I‟m now less confused so I‟ll set up my business‟. In Scotland, Local
Economic Fora were set up with an initial remit to review business support services
with the aim of reducing duplication and saving money. When viewed from a „macro
level‟, there appears to be duplication. However, having examined services in more
detail, they found only limited duplication. Compared to the need to increase the
business birth rate, this policy issue may be a serious distraction.


A second concern is the current preoccupation with targets and a policy which aims to
increase the support network‟s market penetration (i.e. the proportion of start- ups
which it assists). The aim appears to be to „touch‟ more start-ups. Experience from
Scotland is that this leads to time and effort being spent on unproductive activity. For
example, call centre „ring rounds‟ are undertaken to establish how many individuals
contacting the system have set up a business by the e nd of the financial year. While
claiming an assisted start, the system may have done almost nothing to assist many of
the „touched‟ start- ups.


More fundamentally, it is not self-evident that increasing market penetration per se is
an appropriate objective. Many would have started anyway. The easiest way to
increase market penetration is to „touch‟ those who need little or no assistance.
Increasing market penetration is not the same as increasing the business birth rate.
Much of the activity will have little additionality (i.e. the start-up would have
occurred anyway). Furthermore, attempts to increase market penetration may regress
into creating a new form of „dependency culture‟ based on the idea that the public
                                            33


sector needs to assist all start-ups.    Perhaps a better model is one in which the
majority can start up without public sector assistance. At the very least, a more
explicit objective (with any necessary targets) to increase the business birth rate
would be desirable.


5.2.2 The Importance of Volume


In designing the support system, it must be recognised that successful economies are
based on a high volume of start-ups. Indeed, there is already a substantial number of
new businesses created each year in the North East. However, the number needs to
more or less double. This suggests that the potential contribution of initiatives which
deal with small numbers will be limited. Furthermore, it again raises the question of
whether the business support network should aim to increase market penetration and
how it can deal with substantially increased numbers.


There is little evidence that the support network is finding it difficult to deal with
current demand. However, in Scotland success in generating demand for Network
services has created new problems. Advice and one-to-one counselling is time
consuming and expensive. Consequently, there is now pressure to find low cost
means of assisting „would be‟ entrepreneurs. Success in the North East will create
similar pressures. These will be further aggravated should EU funding become less
plentiful. Consequently, consideration should be given to how the support network is
to deal with increased numbers (without becoming overly selective).


The challenges are substantial.      One of the original ideas behind the Personal
Enterprise Shows was that they would enable „would be‟ entrepreneurs set up their
business without the need for one-to-one advisory services. In fact, the Shows
generated, rather than replaced, demand for advisory services.             Consequent ly,
considerable effort has been made to develop web-based information systems as a
means of dealing with the volume market within existing (and falling) budgets.


However, at least for the foreseeable future, it is unlikely that the Internet will replace
the need for face-to-face contact. While the Web may enhance the availability of
information, „would be‟ entrepreneurs need more than information and the evidence is
that they want and need somebody to talk to. This is not to argue that IT cannot be
used to improve the efficiency and delivery of start- up services. It is, however, to
argue that it will not provide an easy, low cost means of dealing with a substantially
increased volume of start- ups.
                                           34


Consideration needs to be given to a system able to deal with large numbers in a cost
effective manner while providing sufficient assistance to make a difference. While IT
has a contribution to make, other mechanisms are also required. In the US, for
example, more widespread use is made of group sessions and unpaid „retired‟
business executives with business and management experience (e.g. the SCORE
programme).


5.2.3. The Role of Entrepreneurs


Knowing an entrepreneur is an important factor which generates interest and enables
individuals set up in business. Not knowing one is a major factor constraining those
with an interest converting this interest into action. Evidence from Scotland also
shows that the majority of „would be‟ entrepreneurs prefer to talk to a successful
entrepreneur rather than a public sector advisor.


This implies that there are advantages in a system based on advice from existing and
retired entrepreneurs rather than one dominated by „public sector‟ employees. The
SBA‟s SCORE programme is delivered by retired executives working part-time via
local chapters (i.e. self- managing branches) often located in local Chambers of
Commerce. The SBA provides training for the counsellors who provide the service
as a means of „putting‟ something back into society and out of self- interest (e.g. it‟s
interesting, possible investment opportunities etc).


The US approach might form the basis of a relatively low cost expansion in the
supply of appropriate start-up advice. However, it should not be seen as the answer
since many „would be‟ entrepreneurs prefer advice from enterprise agencies seeing
them as more independent or objective. Similarly, many wish to talk to both
successful entrepreneurs and full- time advisors (generally because they perceive
different benefits from the two sources). Consequently, a system offering consumer
choice is desirable.


5.2.4 Aftercare


Mainly reflecting the desire to increase the new firm survival rate, there is substantial
pressure to increase the availability of post-start aftercare advice and assistance.
While this appears highly desirable, the following considerations should be taken into
account:
                                              35


          As yet, there is little evidence that aftercare has a significant impact or
           represents good value for money.
          The most effective aftercare may come from better quality sta rt-up advice.
           Once started, additional advice and assistance may be too late. Evidence
           suggests that an important impact of pre-start advice is on survival rather than
           the business birth rate.
          Devoting resources to aftercare may make little sense if the Region‟s problem
           is the low business birth rate (rather than low post-start survival rates).
          Aftercare services are resource- intensive. Given that resources are probably
           required to expand the availability of start- up services, the obvious question is
           whether start- up and aftercare advisory services can be adequately resourced
           simultaneously.
The argument is not that aftercare is not desirable. However, it is being argued that
strategic choices may need to be made and that the business support network sho uld
not simply drift into accepting that the public sector should provide aftercare services.


5.3       The Role of Education


5.3.1 Schools and/or Further and Higher Education


The need to raise awareness of the enterprise option and to stimulate entrepreneurial
action arises, in part, because entrepreneurship education is not embedded within the
UK‟s education system. To the extent that it has an explicit concern with labour
market issues, the focus is on employment in the public sector and large corporatio ns.
However, it is now widely recognised that education has a key role to play in creating
a more entrepreneurial society. Reflecting this, enterprise education is being
prioritised by an increasing number of governments around the world. This includes
the UK 4 .


Based on the perceived need „to get them young‟, the emphasis is often on school
education. In Scotland, for example, the focus has been on enterprise education in the
primary sector with much less progress in secondary schools. In England, the
government has accepted the Davies Review recommendations that every secondary
school pupils should receive at least 4 days enterprise education. Pilot projects are
currently underway in 151 schools around the country and, based on the results of
these pilots, a £65m national programme will be introduced.

4
    OECD (2001). Putting the Young Into Business: Policy Challenges for Youth Entrepreneurship,
    OECD, Paris.
                                               36


At the very least, the North East should participate actively in this programme to
introduce enterprise education into the school system. Furthermore, it should ensure
that enterprise education incorporates entrepreneurship education (i.e. enterprise skills
applied in the context of setting up, growing and running a commercial business).
Generally enterprise education is interpreted as a generic set of skills (such as
creativity, problem solving, self- motivation, independence etc.) which can be applied
in many contexts. Left to itself, the education system will focus on non-business
applications. Consequently, it is possible there could be enterprise education
everywhere and entrepreneurship education nowhere. The region needs to ensure that
enterprise education does not become over- focused on applications in social
enterprise, charities, community services, environmental and social projects, or,
indeed, large companies. (For example, much activity currently labelled as enterprise
education is, in reality, about big business issues).


While the region should actively participate in national school programmes, whether
the emphasise should be on school, further or higher education remains a relevant
strategic question. In this context, we note:
        The Davies Review, based on an extensive survey of school pupils, found
         widespread interest in, and awareness of, entrepreneurship. It concluded that
         there is no evidence of an anti-enterprise culture amongst the young. This
         suggests the issue is not about awareness or „cultural change‟. Rather, the
         requirement is to give pupils the tools to convert their interest into reality 5 .
        The Review found substantial variation between schools and areas in
         awareness and understanding of entrepreneurship. More resources and effort
         may be required in schools in less entrepreneurial areas. Pupils have fewer
         entrepreneurial role models. The North East could usefully undertake a
         survey of the Region‟s schools to establish whe ther pupils have less
         entrepreneurial awareness and attitudes than elsewhere in the UK.            This
         determines whether anything more needs to be done over and above national
         programmes.
        If entrepreneurship is not embedded in Further and Higher Education, a focus
         on schools may not be a good use of resources. With a large and increasing
         proportion of school leavers going into FE/HE, any interest in
         entrepreneurship may be undermined or overridden by the students‟
         experience of FE or HE. Ideally, FE/HE should build on what is achieved by
         school education.


5
    Davies, H. (2002). A Rev iew of Enterprise and the Economy in Education, HMSO
                                           37


         Policies which focus on (especially primary) school education will take many
          years to have an impact on the business birth rate. A focus on FE and HE will
          have a quicker (but certainly not immediate) impact. Re flecting the Davies
          Review‟s conclusion that many school pupils are interested, the evidence is
          that many students entering HE are interested in the possibility of setting up
          and running their own business.
Based on these observations, it can be argued that rather than starting with primary
education and working forward to FE/HE, a more effective strategy would be to start
with FE/HE and work backwards into secondary and primary school education. At
the very least, FE/HE and school education should be tack led simultaneously.
Focusing on schools without ensuring entrepreneurship education is already
embedded in FE/HE may be the least appropriate strategy.


5.3.2 Further and Higher Education


Despite recent progress, entrepreneurship education is not widesp read in the UK‟s (or
the North East‟s) Universities.        In contrast, the widespread teaching of
entrepreneurship in US colleges and universities is seen as one explanation for the
entrepreneurial nature of the US economy. To quote the OECD:
        “For any US person who makes his or her way through the education
        system to an undergraduate degree, a lack of knowledge about
        entrepreneurship can no longer have much force as an entry barrier to
        new business formation. A person must make some effort to avoid
     entrepreneurship awareness or training.” (p. 67)
In the UK, policy has focused largely on academic spin outs rather than
entrepreneurship education per se. Nevertheless, there is now growing interest and
HEFC is examining how entrepreneurship might be more effectively introduced into
the curricula.


One possibility is to teach entrepreneurship as a „stand alone‟ subject (often as part of
a business studies course). However, entrepreneurship education is relevant to a
much wider range of disciplines. Business found ers require a combination of
technical knowledge (which may form the basis for the product or service) and
business skills.    Biotech companies are set up by biotechnologists, not business
studies students.    Consequently, hybrid education combining entrepre neurial and
technical knowledge is required.
                                             38


This is recognised by some of the recently created Science Enterprise Centres. In
addition to encouraging and assisting academic spin outs, some are enabling the
introduction of entrepreneurship education into science and technology courses.
However, entrepreneurship education is equally relevant to subjects relating to the
media, creative industries, art, the professional services such as law, accountancy and
architecture. With more and more services being provided via out-sourcing and the
private sector, it is even relevant for students in disciplines such as health, psychology
and social work. Indeed, there are very few subjects in which it is not relevant either
intellectually or in terms of possible career options.


The probability of an individual setting up a business increases with his or her level of
education. In Scotland, for example, 7% of the economically active without any (or
minimal) qualifications are self-employed or run their own business. This rises
gradually to 17% for those with at least a degree level qualification. The proportion
of graduates who are self-employed or running their own business is also increasing
over time. As yet, few universities recognise how many of their students will become
self-employed and the importance of entrepreneurship education (both to their
students future careers and economic development).


It is also often argued that entrepreneurship is only relevant to the minority of students
who wish to become self-employed. While this is a substantial minority, the OECD
goes further arguing that to create an entrepreneurial economy the vast majority of
students should participate in some form of entrepreneurship education. This will
ensure:
      “Family and friends will support the decision to start a business….
       Teachers will nurture them (i.e. entrepreneurs). Social workers in
       disadvantaged areas will encourage them. Bankers will react positively.
       Government officials will not throw up roadblocks. Unless and until all
       society shows the entrepreneurial spirit, the educational task will not be
       complete.” 6 (p. 72)
Without some basic knowledge of what is involved in setting up a business, potential
or „would be‟ entrepreneurs have little idea of how or where to start and other
professions are unable to offer the appropriate assistance and support.


All five of the North East‟s Universities have some involvement in entrepreneurship
education. Durham was one of the UK‟s main centres of entrepreneurship expertise

6
    OECD (2001). Putting the Young into Business: Policy Changes for Youth Entrepreneurship,
    OECD, Paris.
                                          39


(DUBS).     However, with increased emphasis on research and commercialising
science and technology, this expertise has been allowed to disintegrate. Much current
effort, as in Sunderland‟s Hatchery, Durham‟s GLEAM programme and Teesside‟s
incubator, supports a small number of student start- ups. Entrepreneurship is not
widely embedded in the mainstream curricula.


However, there are signs of progress. One of the aims of the now discontinued
Graduate Retention Through Enterprise was to encourage staff throughout t he
universities to include entrepreneurship in the curricula.         In addition to the
commercialisation of research, the Science Enterprise Centre has also supported the
development of entrepreneurship education in science related subjects.


With a budget of around £100k per annum, the Centre has issued a „call for proposals‟
from academics throughout the region who wish to develop modules or electives for
inclusion in mainstream courses. Relatively small amounts of finance are offered to
enable staff develop the necessary teaching material. In Durham, for example, an
elective is now well established in Biology/Life Sciences and, reflecting its success in
attracting students, similar courses are being developed for Computer Science. There
is also growing interest in Physics and Engineering. The Centre has also funded the
development of an MSc at Sunderland (Biology and Enterprise) and MSc modules in
Chemical Engineering and Agricultural Sciences at Newcastle.


As in Scotland, student demand for entrepreneurship related courses is substantial
when such courses are available. As modules are incorporated in mainstream
teaching, so ongoing funding becomes available from HEFC sources. Consequently,
they are sustainable over the longer term. The Centre has issued three annual „calls
for proposals‟ with each being substantively over –subscribed (i.e. there is more
interest in developing entrepreneurship courses than the Centre can fund). However,
funding runs out in 2005 and there is no finance to fund any further proposals. This
type of pump-priming role cannot be self- financing and, at the present time, there are
no accepted plans for its continuation.


However, this is an effective and low cost mechanism for getting entrepreneurship
into the curricula and, we recommend, should be continued. Indeed, its scale and
funding could usefully be increased and its scope broadened to include all disciplines.
More generally, the Region should aim to build on the many initiatives already
underway in the Universities. In order to do this, a systematic review of what has,
and is being achieved, would be a useful first step.
                                           40


As with most policy areas, there is already a considerable number of initiatives in the
Region. However, it should be recognised that most are recent and small scale. Much
more needs to be done if Higher Education is to contribute substantially to increasing
the Region‟s business birth rate. This contribution is only likely to be realised if the
Universities‟ Vice Chancellors are „on board‟ and accept that the teaching of
entrepreneurship throughout the curriculum is a high regional priority.


To date the potential contribution of Further Education has been more or less
completely ignored. The Davies Review proposals and the subsequent enterprise
pilots, for example, exclude FE. However, FE provides vocational education and
training for many young (and not so young) people who enter occupations in which
self-employment and business formation is widespread. This is a serious missed
opportunity. It is recommended that much more should be done to incorporate
business start-up education/training into FE curricula. The Learning and Skills
Council could enable, facilitate and fund this process.


Embedding entrepreneurship into the curricula should be the main priority. Focussing
on a few graduate start- ups will not make a fundamental difference. Nevertheless, as
more graduates become interested (and many are already interested), the Universities
could offer more systematic support and assistance. This should be a service open to
all alumni (and not just recent graduates). Graduates are „happy‟ to use the
universities, it would get the universities more involved with the real world and
increase their commitment to the regional economy.


As with many other initiatives to encourage entrepreneurship, programmes for
graduate enterprise haves been set up and subsequently abandoned. Efforts have been
made to establish a regional programme (which may also have sought to minimise
university control and inputs).       An entrepreneurial economy requires many
organisations to be involved and deliver support to entrepreneurs. This includes the
universities. Programmes which seek to exclude them, while perhaps appearing to
have short term administrative benefits, are in the longer term, counterproductive.


Policy needs to draw the universities in and give them both responsibility and
resources for delivery.    Furthermore, enabling each university develop its own
approach is probably preferable compared to attempts to create a neat and tidy single
regional programme.
                                            41


5.4     Finance


5.4.1 Why Finance?


A coherent and systematic approach to ensuring the availability of finance should be a
central component of the North East‟s business birth rate strategy. Since the vast
majority of „would be‟ entrepreneurs cannot set up a business without finance, it is
essentially a necessary condition for business formation.


Evidence from household surveys consistently show that access to finance is the most
widely perceived constraint on setting up a business. The majority of founders set up
without raising external money (i.e. they rely on personal savings). A substantial
proportion of those who raise external finance report they had difficulty in doing so.
Personal assets to provide security is generally a pre-requisite. While over-stating the
case somewhat, it is very difficult for those without personal wealth to set up a
business requiring even small amounts of investment or working capital.


There is an extensive literature on whether finance is a „real‟ or perceived constraint
and the extent of market failure. No attempt is made to review these debates or to
present a closely argued justification for focusing on finance. However, the cause of
regional economic development would be better served by a commitment to
continuous improvement rather than continuing the rather sterile market failure
debate.    It is always possible to improve access to finance. This should be the
objective. As in other industries, innovation is the ro ute to achieving this objective
(e.g. in terms of lending packages, lower cost delivery and monitoring mechanisms
etc.)


Furthermore, policy should be developed within the context of improving the growth
performance of the regional economy and not simply in terms of correcting market
failure within financial markets. It is often argued that there is little evidence of
market failure because it is not possible for the banks to increase start-up lending
profitability. Indeed, a good starting point for polic y is to accept that, left to itself,
there are severe limits on the banking sector‟s ability to finance new firm formation
commercially.     Without security or some form of government support (e.g.
guarantees), a few start-up failures more than offsets the profits from the interest rate
mark-up on loans to successful start-ups. From the bank‟s commercial perspective,
avoiding failures is essential. However, start-up failure is an inevitable part of a
dynamic regional economy.
                                          42


Consequently, simply encouraging the banks to take more risks or do more in the
start-up market will be ineffective. However, because it is difficult to increase start-
up lending commercially does not mean there is no market failure. It is, for example,
almost certainly the case that the social benefits from lending to „would be‟
entrepreneurs exceeds the private benefits. This source of market failure has been
systematically ignored in the ongoing debate.


This should be the key issue for policy debate. Taking this a step further, it can be
argued that the market failure being addressed is the North-South Divide. It is this,
rather than just market failure in the financial sector, which underpins the case for
public sector intervention. The question becomes, does public sector intervention
increase the business birth rate, regional (and national) economic growth and help
close the North-South Divide?


The US offers many useful policy lessons. Accepting the limitations of commercial
lending, the Small Business Administration has put in place an extensive system of
loan guarantees which underpins the provision of term loans through a large number
of SBA accredited lending institutions (including the mainstream banks). A basic
description of the US systems is presented in Figure 5.1. However, the central point
is that the Americans have not simply left it to the market but, at the same time,
deliver government support through the market. This support underpins lending to all
new starts. It does not only target or support minority or disadvantaged „would be‟
entrepreneurs.


The US system of loan guarantees is self- financing. However, within the context of
closing the North-South Divide, historically the UK Government has provided
substantial subsidy to inward investors through Regional and Selective Financial
Assistance. It could be argued that at least some of this subsidy could usefully be re-
allocated to the indigenous (and in particular, the new firm) sector. There is no
obvious reason why inward investors should be given preferential treatment. This
raises the question of how any subsidy can be most effectively used to increase the
business birth rate.
                                                   43


Figure 5.1:       The US Small Business Administration Approach to Small Business Lending

While it has evolved, the SBA‟s approach is long established. It has no funds for direct lending or
grants but operates via guaranteeing term lending and equity via the private and co mmunity sectors.

The SBA underwrites SME lending on a large scale. To put the amounts into perspective, an
equivalent figure for the North East based on per capita expenditure is given in brackets.

The SBA has a relatively s mall overall budget and staff (on a per capita basis just £7.7m and 81).
However in 2002, its budget provided for the offer o f guarantees u p to $17.6bn (£230m).

For term loans, it operates via some 5,000 (95) cert ified lenders ranging fro m the large banks to small
community based institutions. It offers:
         A 85% guarantee on loans under $150k;
         A 75% guarantee on loans between $150k and (in pract ice) a maximu m of $1.3m;
         Loans to more or less any sector and type of SME (defined as manufacturing firms with
          under 500 emp loyees and other firms with sales of under $5m).
In 2001, loan guarantees under this programme amounted to $21.9bn (£ 233m).
The programme is mo re or less self-financing. This is achieved via a 2% up-front charge plus a 0.5%
annual service charge on the outstanding debt. This illustrates that the programme is designed to
improve access to finance (rather than to marg inally reduce the cost of finance which is generally not
the main constraint on entrepreneurship).

The SBIC programmes was launched in 1958 through which the SBA has helped fund a large number
and variety of venture capital companies. Essentially, it now provides guara nteed matched funding for
money venture capital firms raise in the market. This increases the amount available for investment
and reduces investor risk.

In Massachusetts, with a population of just over 6m and a workforce of 2.9m:
        Over the period 1997 – 00, over 4,200 loan guarantees were made via 50 certified lenders
         valued at $771m.
        Between 1996 – 000, it supported 22 SBICs which provided $913m of equity. So me of the
         States best known VCs are certified SBICs.
The large nu mber of SBA supported institutions illustrates the commit ment to co mpetition, consumer
choice and acceptance of market seg mentation. It is not a neat and tidy oligopolistic lending system.

The importance attached by the SBA to finance is reflected in its objective to be „a 21 st century leading
edge financial institution‟ (1997 Strategy).


5.4.2 Some Options


As elsewhere in the UK, there is already a substantial number of initiatives and
organisations in the North East providing finance. Most of these are small scale and
target a variety of minorities. These include small grants to disadvantaged groups and
equity/venture capital to the tiny minority of potential high growth new starts. Central
                                            44


Government programmes such as the Loan Guarantee Scheme also remain small scale
and are not ideally suited to the mainstream start- up market.


As reflected in the Government‟s current consultation exercise relating to the
possibility of creating Small Business Investment Companies, there is growing
recognition that more needs to be done to impro ve access to finance. In taking
forward this debate, it should be accepted that polices are required which finance a
large increase in new firm formation. This probably means policies which underpin
mainstream entrepreneurship rather than simply targeting a minority of „would be‟
entrepreneurs.


There are many different ways in which this could be achieved. Here we consider
three broad options. First, it is possible to provide start-up grants. Small grants are
widely used largely because they are easy to administer via small initiatives and
organisations. There is no need for administrative procedures which monitor loans,
collect interest and loan repayments.


However, it is recommended that the use of grants should be avoided at more or less
all costs. This is because:
       Grants are expensive. A massive amount of public money would be required
        to finance a large increase in the business birth rate.
       It reinforces a grant or subsidy culture.
       It is access to finance (and not specifically a grant) which affects the business
        start-up rate.
       There is no reason why those who set up a successful business should not (be
        happy to) repay the money.
The disadvantages substantially outweigh the administrative benefits of giving small
scale grants. Furthermore, the administrative benefits only come into play because
there is no effective system for administering loans.


The second option is a policy based on making loans widely available. The use of
loans both creates a more appropriate commercial culture and enables public sector
money, via interest and loan repayments, finance a larger number of start- ups.
However, it is highly unlikely that new start loan programmes can be self- financing.
This is particularly true if the aim is to increase the business birth rate. New start
business closures are inevitable. Consequently, without a high mark- up (i.e. high
interest rates) or „upside gain‟ from the winners, interest and loan repayments will not
                                           45


fully cover operational and investment costs. In other words, start-up loan funds will
require ongoing public sector subsidy.


However, this subsidy should be used to push back the frontiers of lending (i.e. to
support more risky or marginal start-up proposals). There is little case for using the
subsidy to provide soft loans with low interest rates to individual businesses. A small
reduction in the interest rate (i.e. the price) of a start- up loan has more or less no
effect on the business birth rate. It is access to finance rather than marginal variations
in the cost of finance which matters. Furthermore, there is no reason why successful
entrepreneurs should not pay a commercial rate. (This does not exclude the
possibility, of course, of repayment flexibility to ensure that loan repayment schedules
do not unnecessarily force business closure via cash flow problems).


A strategy based on public sector loans requires an effective administrative system for
making lending decisions, monitoring and collecting interest and repayments. To
justify the necessary overheads, loan programmes need to be on a substantial (perhaps
regional) scale. Similarly, such a system needs longevity.


Finally, the third option is an approach, as in the US, based on loan guarantees.
Compared to the direct provision of public sector loans, this has three distinct
advantages:
      They enable lending via the commercial sector (e.g. the banks). This gets the
        banks more actively involved in the start-up market.
       There is no need to create a new lending and administrative system; and
       Less public money is required „up front‟ (i.e. it is only necessary to meet a
       proportion of losses from loan defaults).
To be effective, an approach much more like that of the SBA (rather than the current
UK model) is required.


At a regional level and for organisations such as One North East, perhaps one of the
most significant constraints on the use of such an approach is the treatment of
guarantees in public sector accounting. However, accounting practices can be
changed and, assuming the aim is to make a significant differe nce, it could be worth
exploring this option further.


A concern often raised when the public sector aims to increase the supply of finance
to new firms is that this displaces the private sector. Here we simply note that this
argument can only be valid if the private sector is already doing the job. More
                                          46


importantly, if public sector involvement increases the business birth rate, this
increases (rather than displaces) demand for private sector financial services. In the
US, for example, it is well recognised that early stage public sector finance has
increased the size of the start-up market and the „deal flow‟ for second and third
round venture capital investment. It has helped develop (rather than displace) the
private sector market.


6.    Concluding Observations


No attempt is made to summarise the main arguments or recommendations. To
conclude, we simply re-emphasise that increasing the North East‟s business birth rate
is an important but major challenge. It will not be achieved without long term
commitment and substantial resources. An improvement across the economy is
required which will not be achieved with an undue emphasis on social enterprise and
self-employment as a route to social inclusion.


Nor will a substantial improvement occur via the b usiness support network
concentrating on those currently in the process of setting up a business. A much
wider, more integrated approach with entrepreneurship as a critical element of many
policy agendas is necessary. In this context, the pre-start process via which „would
be‟ entrepreneurs are created (e.g. education) are critical. Finally, in addition to
marketing the entrepreneurship message and stimulating „would be‟ entrepreneurs to
take action, some big high profile initiatives would be useful demo nstrating to the
local population that entrepreneurship matters and is being taken seriously. A „big
idea‟ would ideally focus on improving access to finance.
                           47


Annex One:         List of Inte rvie wees

Name                                           Organisation
Jim Anderson                  Small Business Service
Dawn Cranswick                One North East
Judith Gill                   Prince‟s Business Trust
Russell Griggs                One North East
Keith Hermann                 Durham University Business School
Rachel Orange                 Durham University Business School
Geraldine Pinder              Wear Valley Develop ment Agency
Alexa Rainsford               Tyne and Wear Business Lin ks
Max Robinson                  NEXI, Mountjoy Research Centre
Doug Scott                    TEDCO
Geoff Scott                   Small Business Service
David Smith                   One North East
Andrew Sugden                 One North East
Craig Tarling                 One North East
Caro l Taylo r                One North East

								
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