Creating High Growth Firms: What Should Policy Do?

1. Creating High Growth Firms: What Should Policy Do? Colin Mason Adam Smith Business School, University of Glasgow Paper to the 2014 ERAC Mutual Learning Seminar on Research and Innovation Policies European Commission, Brussels, 20 March 2014

2. Introduction • Enterprise policies: from ‘quantity’ to ‘quality’ • 1980s and 1990s policy focused on increasing business start-ups • Now the focus is on high growth firms (HGFs) (‘the vital 6%’ – NESTA) • Economic benefits of HGFs • Ability to create significant numbers of jobs • Above levels of productivity • Export-orientation and internationalisation • Spill overs • Innovative • [But are these effect the same everywhere: e.g. core region vs. periphery, metropolitan city vs. 2nd tier cities, vs. rural area?]

3. HGF policies based on ‘myths’ • Wrong assumptions, so looking in the wrong places, providing inappropriate support • Presumption of a strong link between TBFs, including USOs, and HGFs • Presumption of a strong link between R&D expenditure and HGFs • Presumption that HGFs are young (‘gazelles’) • Presumption that growth is localised (‘footprint’ issue) • Presumption that HGFs are ‘new’ – ignored importance of pre-incubation (e.g. MBO) • Presumption that HGFs are mostly venture capital-backed • Presumption that growth is linear • Presumption that growth is organic • Presumption that firms quickly achieve scale

4. continued Summary: • No such thing as a typical HGF • Macro-stability vs. micro-instability • Population of HGs is constantly changing 2. Value judgements • Manufacturing is more valuable than services • But HGFs are often ‘solutions providers’, offering knowledge based services around a physical product

5. Consequences for policy design and delivery • Assistance is largely focused on support for R&D • Assistance is skewed to access to finance, especially venture capital • Assistance is targeted at certain types of firms: e.g. firms at their start up stage • Nature of support is transactional (grants, investment) rather than relational

6. What might ‘good’ HGF policy look like? • Need policies for both start-up and scale-up • Start-up policies: • Can’t ‘pick winners’, but can set up ‘HGF identification unit’ to • identify entrepreneurs with ambition • Identify firm showing ‘early signs of potential growth • These firms needs specialist support, not generic start-up support • Scaling-up policies • Finance • Strategic advice and support • Overseas market entry • Leadership development

7. continued 2. Time-specific, time-limited • Growth is erratic, sporadic and short-term, so need for support varies over time • Focus assistance as firms go through growth trigger points 3. Nature of support • No fixed offer: customised assistance • Delivery of support • Account managers: regular and close contact with companies and able to identify needs and appropriate support

8. continued 5. Tools • Market-pull mechanisms, reflecting importance of end-users in innovation • Marketing and, especially, sales support • Internationalisation support • Leadership development • Relational support • Advice from peers rather than policy makers and consultants • Mentoring from other entrepreneurs • Support to recruit and build boards: NXs and Chairs • Finance: takes €10m-€20m (at least) to build a global business: • Sub €1m funding initiatives need to be complemented with larger funding • Not just VC

9. continued 6. Good framework conditions are not enough – importance of entrepreneurial ecosystems • HGFs have a distinct geography • Weak association between localities with high start-up rates and those with high numbers of HGFs • Importance of ecosystems for the emergence of HGFs • Real challenges for policy-makers to develop entrepreneurial ecosystems

10. Continued 7. Need to ‘anchor’ HGFs • HGFs often get acquired • Inherent in the VC model • Resource constraints • Ambition issues • Danger that HGF policy becomes ‘build to sell’ • Should acquiring companies have to repay grants and other assistance? • Does this matter? • What is the motive? Access to resources, distribution channels, reputation, etc. Or to access IP, eliminate competition • HQ is vulnerable following acquisition. This may be the main ‘footprint’

11. continued • Promote stock exchange listings as alternative exit, source of growth capital • For local companies that are taken-over, offer a pro-active after care service (c.f. FDI support)

12. Sources: • Mason, C and Brown, R (2013), ‘Creating good public policy to support high growth firms’, Small Business Economics, 40 (2), 211-225. • Mason, C and Brown, R (2014) Entrepreneurial Ecosystems and Growth-Oriented Enterprises. OECD LEED programme. http://www.oecd.org/fr/cfe/leed/entrepreneurialecosystemsandgrowth-orientedentrepreneurshipworkshop-netherlands.htm • Brown, R, Mason, C and Mawson, S (2014) Increasing ‘the vital six percent’: designing effective public policy to support high growth firms, NESTA Working Paper 14/01. http://www.nesta.org.uk/sites/default/files/working_paper_-_increasing_the_vital_6_percent.pdf • Mason, C and Brown, R (2010) High Growth Firms in Scotland, Scottish Enterprise, 65pp. https://www.scottish-enterprise.com/~/media/SE/Resources/Documents/GHI/High-growth-firms-in-scotland.ashx