Yesterday’s blog talked about the importance of cities being open to external influence. While this is true, there are two prongs to private sector economic growth in our cities – the ability to attract businesses from elsewhere and the ability to ‘grow your own’. Our strongest cities are those that have been able to do both.
On the whole cities have been good at attracting branch businesses – 45 of our 64 cities had a share of branch businesses above the national average in 2010. What they are less good at is enterprise. Taking business start-ups as one measure of enterprise, just 13 cities had business start-up rates above the national average in 2010.
Does this matter? The 35 cities that have a share of branch businesses above the average but business start-ups below the national average have been able to shortcut weaker levels of domestic enterprise by ‘importing’ businesses from elsewhere. These branches, on the whole, have created jobs and contributed to economic expansion.
This is all well and good over a shorter time period. But urban economist Ed Glaesar’s work on Boston and Detroit suggests that this could be bad for longer term growth. Detroit was once a city of enterprise, but slowly became dominated by large businesses hungry for low skilled labour. Boston, on the other hand, has retained both its appetite for enterprise and high skilled workers which has allowed it to continue to prosper at a time when Detroit grapples with long term decline.
The majority of the UK’s strongest cities (i.e. those that are classed as buoyant in our Private Sector Cities report, shaded green in the chart below) are those that have are large proportion of branch businesses and high levels of enterprise. And if the colours of this chart were changed to represent GVA per worker – i.e. productivity – a very similar pattern would emerge.
So enterprise is important for a city’s economic success. But now comes the tricky bit – what should public policy do to support enterprise? There’s been no shortage of enterprise initiatives from Governments both blue and red, ranging from Thatcher’s Enterprise Allowance Scheme to New Labour’s Local Enterprise Growth Initiative. The recently Start-up Loans are the latest addition to the list. But the impact that these schemes has had is unclear.
A big problem is defining what the Government’s role should be. The private sector is very capable of providing business advice, particularly through the traditional channels of lawyers and accountants. And it’s interesting to see that the ICAEW are offering free consultation sessions with businesses to give guidance on issues such as tax, business plans and access to finance. So the case for direct blanket public sector support is weak.
But the Government could help increase the size of the market for local businesses to encourage enterprise in two ways. Firstly it could reduce the bureaucracy around tendering for public sector contracts, making them more accessible for smaller businesses. Secondly it could look to encourage stronger links between branch businesses and the local business base to foster trade between them.
But underlying this is the requirement to get the basic conditions for business right. As is the case with businesses looking to relocate, the expansion of a homegrown business will hampered by the lack of skilled workers or poor transport links. Getting these basics right may not boost enterprise on its own. But enterprise is unlikely to thrive without addressing the fundamentals first.
To see more analysis on the shape of business across cities see our new report, Open for Business.