Following the success of our first series of workshops on how to develop effective local industrial strategies last year, we have been busy for the last few months running a second series with the support of the Cities and Local Growth Unit (CLGU).
The government has committed to working with all places to develop Local Industrial Strategies by early 2020. These strategies will be developed locally and agreed with the government. They will map out distinctive strengths as well as local responses across the Industrial Strategy’s ‘foundations of productivity’.
We held four workshops in four different UK cities, each one focusing on one of the ‘foundations of productivity’ – people, ideas, business environment and infrastructure – and its interaction with our foundation of interest, place.
Local Industrial Strategies
The Government’s Local Industrial Strategies Policy Prospectus (October 2018) set out two objectives. Government is committed to Local Industrial Strategies so that all places:
- Are able to increase productivity and realise their potential: building on well-evidenced and distinctive strengths aligned with the National Industrial Strategy.
- Set out the spatial impacts of national and local policy across our cities, towns and rural areas: informing priorities and choices and demonstrating how they will allow all communities to contribute to, and benefit from, economic prosperity.
The policy prospectus set out that Local Industrial Strategies will inform the approach of LEPs/MCAs to maximise the impact of future funding, including the UK Shared Prosperity Fund (UKSPF). The UKSPF will look to tackle inequalities between communities by strengthening the foundations of productivity.
For our third workshop, we were in Sheffield discussing the importance of local business environments and their role in enhancing productivity. The day included presentations from the What Works Centre, the Enterprise Research Centre, the Sheffield City Region and BEIS as well as lots of discussion.
The importance of business environments
A good business environment is one where entrepreneurs can set up new ventures easily, where good ideas and processes are implemented and bad ones are allowed to fail.
But good ideas and processes can be difficult to implement if firms aren’t aware of those ideas and processes, or if the costs of implementing exceed, or are thought to exceed the benefits. This is a problem for the UK – on average; managers in the UK perform worse than those in comparable countries leading to lower productivity and poorer firm performance.
A central justification for business support policies is to raise awareness of new ideas and processes and to encourage implementation by providing information and advice that change the costs and benefits. But simply providing this advice isn’t enough – many businesses are unaware that advice is needed, unsure as to what constitutes good advice and uncertain about where to find it. These are some of the reasons why only 40% of UK businesses have received formal, external advice.
Addressing this information asymmetry is the basis for government intervention in the market for business advice. In doing so, we hope to improve the performance of the businesses that participate in these programmes and beyond.
But the importance of business environment extends far beyond traditional questions of business support. Many decisions of government, e.g. around training, taxation and infrastructure, affect the business environment.
As with all the Industrial Strategy’s foundations of productivity, the business environment pillar has strong linkages with the others. For example, well performing, successful businesses are much more likely to invest in R&D, innovate and aid with idea generation. They are also much more likely to discover, adopt and support idea diffusion. Much of the discussion on the day revolved around the strong linkages this generates between the business and ideas foundations (see here for a write up of our ideas event).
What we know about what works
As we’ve just discussed, the range of interventions that affect business performance is wide. Even if we focus specifically on business advice, we see a wide range in the types of intervention. Our evidence base suggests that their range of effectiveness is fairly wide too. It also suggests that even within the same family of programmes, some programmes appear to be far more effective than others. All of this means that the detailed elements of design are very important.
The What Works Centre evidence review and our toolkits on business advice provide lots of detailed information on what we know. On the day, we summarised some of this evidence for a few interventions we thought were interesting for LIS, partly because of links to other foundations:
- Subsidised consultancy
- Export Promotion Agencies (EPAs)
- Export Credit Agencies (ECAs)
There are a few key takeaways that emerge from the full evidence base:
- More intensive, ‘hands-on’ programmes appear to have a bigger impact than ‘light touch’ ones.
- But costs differ a lot too and we don’t know whether more intensive support is more cost-effective.
- We also know that overall, these interventions are better for improving sales than they are for increasing employment or productivity.
- Some of them (e.g. accelerators and incubators) work best in places that already have strong entrepreneurial ecosystems.
The evidence is unclear on what modes of delivery work better – Local vs. National or Private vs. Public sector led. We also know little about whether focusing the programmes, either by sector or by objectives works better than more broad-based or generalised support. We know very little, if anything, about the relative cost-effectiveness of different kinds of support.
Given its emphasis on and encouragement for experimentation, supported by appropriate evaluation, the LIS could be a very useful vehicle for furthering this evidence base. This would complement existing experimentation that central government is already doing – e.g. through the Business Basic Fund.
The most important principles to bear in mind
Our work on Local Industrial Strategies identified 10 principles to consider in designing effective strategies. Here’s an example of how some of these play out in thinking about business advice policies.
It is very important that we understand the state of the local economy and how it is evolving as we design initiatives to improve the local business environment.
To understand the state of the local economy, we need to make sure we know what the structure of the business base looks like: is it lots of small firms, large firms or a mix of both? What sectors do these firms operate in? Do they provide local services or tradable goods? How productive are they and is it realistic to expect large productivity increases from them? Etc.
To understand how the local economy is going to evolve, we need to get to grips with what challenges and opportunities the upcoming demographic and technological changes are going to create (the grand challenges are a useful framework when thinking about this). The initiatives that are informed by the answers to these questions will be better placed to support and foster the local entrepreneurial ecosystem.
But descriptive evidence on the state of the local economy and how we think it might evolve only get us so far in the development of effective LIS. We will still need to target the policy response, for example by assessing whether intervention needs to be on the demand side or the supply side.
For example, if the analysis indicates that firms are willing and enthusiastic to receive advice but do not know where to go, then intervention should seek to correct the supply side, either by providing information or even direct provision. On the other hand, if the supply of advice is available and robust but under-consumed, the issue may be that firms do not fully recognise or internalise the benefits, in which case subsidies might prove to be the better alternative.
We need to ask similar questions about the wider set of policies that affect the business environment.
For example, if there are issues around access to credit, is this a reflection of restrictions on the supply of that credit? Or is it weak local economies making individual business propositions less viable and constraining the demand for credit? Similarly, if firms are not investing in training their workers, is this because the skills of workers or the firm’s rate of employee turnover result in poor returns on that training? Or is it because firms underestimate the benefits?
Finally, it is important to be mindful of how the policies may affect competition or distort the market – either by sector, size or new entrants vs. incumbents – to mitigate or avoid unintended consequences.
Discussion of business support programmes already give some consideration to these issues but the wider scope of the LIS means that these issues will need to be much more central.
Things to bear in mind when articulating the policy response
Here are some of the most important things to keep in mind, which emerged from the presentations and the wide-ranging discussions of the day:
- There is a natural tension between the objectives of business advice policies. These tensions should be understood well if we are to manage them effectively.
- For example, for start-up support programmes, like accelerators and incubators, should the targeted outcome be survival rate, exit rate or survival time? The answer will partly depend on whether the purpose of these programmes is to create new businesses or to support the testing of new ideas. If the former, survival is important. If the latter, we might be more agnostic on survival rate if support allows entrepreneurs to identify bad ideas as well as good ones.
- Supported businesses will hope that participation in the programme would increase sales and turnover, employment and productivity. But from a local economic perspective, increased turnover and sales, and even increased employment, don’t necessarily translate in to local economic benefits if these increases come at the expense of other local firms. Even productivity increases may come at the expense of unintended impacts on local employment.
- It is also worth bearing in mind that irrespective of how well a programme is designed and implemented, it is possible that the evaluation might not detect benefits if evaluation is done too early. By definition these initiatives develop skills (leadership, management, entrepreneurial etc.) that take time to show effects and these effects may cumulate over time. This should be borne in mind when setting targets and milestones. Possible selection bias in to programmes highlight the importance of a control group to properly assess the impact of the programme on supported firms. BEIS’ Business Support Evaluation Framework is a useful resource to refer to when designing evaluation plans in this policy area.
- BEIS’ RANE model (Realisation, Assessment, Navigation and Embedding – more detail in slides) of business change provides one way of thinking about how the process of change works from the businesses’ perspective. It may prove useful to think about and target the different stages of the process separately.
Things to do when implementing the policy response
The presentations and subsequent discussions also highlighted some key messages for implementation:
- Trust may be important in making business support programmes successful. For many businesses that do recognise that they need help, understanding what kind of help they need and where to get it from is a big barrier to seeking out business advice. Delivering beneficial outcomes is important to gaining trust and keeping the firms engaged in the process.
- As helpfully pointed out by our speaker from the ERC, there is a strong, perhaps excessive focus on targeting and fostering ‘high-growth firms’. There are good arguments that suggest we should target creating ‘high-growth periods’ instead, irrespective of whether a firm is new or established even if it means engaging with firms that are currently comfortable and pushing them to be a bit more dynamic.
While it is true that much of what makes the UK a good place to conduct business is within the hands of Westminster, there is still plenty that local government can do to build this capacity from the bottom-up. In doing so, it is vital that places understand the characteristics and the needs of their local businesses for the said activity to be effective in creating a dynamic local business environment.