APPENDIX 1
Memorandum from the Federation of Small
Businesses Wales
HOW THE
FEDERATION OF
SMALL BUSINESSES
WALES REPRESENTS
THE SMALL
FIRMS SECTOR
IN WALES
The Federation of Small Businesses Wales is
the Welsh arm of the Federation of Small Businesses (FSB). Formed
in 1974, the FSB is a non-party political campaigning group that
exists to promote and protect the interests of all who manage
or own small businesses.
FSB Wales is in an ideal position to comment
on the effect of legislation on small businesses in Wales. With
over 5,000 members, two regional committees, and six branch committees
throughout the country, it maintains constant contact with small
firms at a grassroots level.
INTRODUCTION
2.1 Local businesses should now take priority
over inward investment. As investment from Asia falters and competition
from eastern Europe grows, the next phase of regeneration will
have to be driven squarely by home-grown companies.
2.2 We have recently seen what we have feared
for a long time: the WDA were concentrating too much on going
for the `big kill', the multi-nationals that would provide a lot
of jobs quickly, and not paying enough attention to nurturing
the smaller indigenous firms. The Halla forklift truck plant in
Merthyr Tydfil remains largely unused, and there is still some
doubt as to whether LG will create as many jobs as was first envisaged,
due to the financial crisis in the Far East.
2.3 It has also emerged recently that money
was switched from CELTEC's discretionary Local Initiative Fund
(LIF) to help train workers at Newport's LG factory. The overall
budget for the TEC was cut by 20 per cent, with a reduction of
25 per cent in its Business Support Budget. Chief Executive Anthony
Drew said that this would have a detrimental impact on small businesses
in North Wales.
2.4 We need to ask ourselves the fundamental
question of whether this has actually been the right road to go
down, because despite success in attracting overseas investors,
Wales still has some of the worst unemployment blackspots and
lowest wages in Britain.
2.5 John Ball, an economist at Swansea Business
School, claims past policy has made Wales dependent on low-skill,
low-wage jobs. Compared with more than £40,000 a job granted
in subsidy to LG, he says that indigenous investment could generate
more high-quality jobs for £2,000-£3,000 each.
2.6 Indeed, small businesses make up over 99
per cent of firms in Wales, and this vast job-creating potential
is largely being ignored. Schemes are only scratching the surface
of this: the Sole Trader Initiative, for example, has created
a staggering 342 jobs in North Wales (January 1998) at a cost
of less than £400 a job.
2.7 The Welsh Office and WDA have countered
criticisms with statements of support for indigenous companies,
and a promise of more staff in local offices. However, the agency's
business development budget is nearly half for that for the international
division, responsible for overseas investment, and staffing levels
will still be three times lower.
2.8 With only 7.7 per cent of the workforce
employed by overseas companies, these figures are still disproportionate,
but what distorts the picture even further is the question of
grants. Compared with aid packages such as £247 million for
LG, the figures attracted by indigenous businesses hardly even
register.
2.9 Small indigenous businesses are Wales' economic
future, and we will be seeking to illustrate how they can be helped
to grow and prosper.
THE WELSH
ECONOMY—A BRIEF
OVERVIEW
Small Firms In Wales
3.1 The importance of small firms in Wales cannot
be underestimated, especially in the North, Mid and Western regional
economies. Wales has some 164,000 self-employed, and over 76,000
unincorporated companies registered with Companies House (Office
of National Statistics; September 1996). Over 128,700 firms
in Wales employ under 25 workers (Welsh Employer Survey;
1995).
The Self-Employed
3.2 Ceredigion in Mid Wales has more self-employed
than anywhere else in the UK, with 27.2 per cent of the economically
active residents of working age falling into this group. Second
in this list, also in Mid Wales, is Brecon and Radnorshire with
25 per cent. Powys as a whole has the highest proportion of businesses
in Wales with a turnover of under £37,000 (Central Statistical
Office; 1995).
3.3 In North Wales, Carmarthen and Meirionnydd
Nant Conwy have nearly 25 per cent self-employed, and in West
Wales Pembrokeshire has a rate of over 20 per cent. The average
for England and Wales is 11.5 per cent: of the top 10 self-employed
areas, five are in Wales.
Types of Business
3.4 One of the most striking features of the
figures is the extent to which agriculture affects the picture
in Wales. While only one in 10 businesses in the UK as a whole
is in agriculture, forestry and fishing, in Wales this sector
accounts for almost a quarter (23 per cent).
3.5 Analysis by industry in Wales reveals that
over half (53 per cent) of businesses in agriculture, forestry
and fishing fall within the smallest turnover band (under £37,000).
Other important industries in this band are construction (25 per
cent), and transport (24 per cent).
3.6 However, in the under-£99,000 turnover
band, catering is the most popular industry, accounting for some
35 per cent of that sector, with retailing not far behind (29
per cent).
Earnings
3.7 In North Wales, the County of Conwy has
the lowest average earnings for full-time employees in the whole
of Britain, at £14,773 per annum (Office for National
Statistics; 1997). The neighbouring county of Gwynedd is the
fourth lowest.
3.8 Levels of earnings in West Wales have consistently
remained below the Wales and UK averages. As a proportion of UK
average figures, male non-manual weekly earnings continue to fall
throughout West Wales (Source: West Wales TEC; 1997).
THE SERVICE
SECTOR
4.1 From the previous overview it becomes clear
how important the service sector is to the Welsh economy. It is
vital that the service sector is recognised as vital, with small
indigenous businesses at the forefront of this.
4.2 An interim report by management consultants
McKinsey found that Britain's service sector, including food retailing,
hotels, telecoms and computer software, were all well behind the
best-performing countries.
4.3 This sector has suffered in recent years
because support has always been targeted at either inward investors
or manufacturers. But service industry sectors are amongst the
fastest growing parts of the economy (Institute of Welsh Affairs,
1998). However, in Wales the growth rate over the period 1991-95
was less than the UK as a whole.
4.4 The Institute's Wales 2010—Three
Years On report (December 1996) concluded that if Wales had
the same proportion of jobs in the service sectors as the UK as
a whole, there would be substantially more jobs in the services
sectors and, in particular:
— 12,000 more jobs in transport, storage
and communications (particularly telecommunications) compared
with 46,000 in 1996
— 18,000 more jobs in financial services—banks,
insurance, etc. compared with 25,000 in 1996 and, even more strikingly
— 49,000 more jobs in business services
compared with 72,000 in 1996.
4.5 Inward investment of service industry companies
can assist Wales in gaining more of the fastest growing sectors,
for example design services, software and IT businesses, research
and development centres for international companies, and international
and national telephone call centres (Wales has some but not many
compared with England, Ireland and Scotland).
4.6 However, inward investment alone is not
going to accelerate the rate of change that needs to occur if
Wales is to have its fair share of the economic growth sectors
of the next century. As with the manufacturing industry, the priority
now—quite rightly—should be to develop more indigenous
service sector business in the important growth sectors of the
next 10 years and beyond.
A BUSINESS BIRTH-RATE
STRATEGY
5.1 A Business Birth-rate strategy is needed
for the key growth sectors in service industry where companies
provide a service for customers outside Wales, and the rest of
the UK.
5.2 This should be a key responsibility for
the new Economic Powerhouse, as well as the Welsh Assembly. In
the recent past, no organisation has had prime responsibility
for new business start-ups.
5.3 John Redwood, when Secretary of State for
Wales, specifically banned the WDA from having any responsibility
in this area and the seven TECs have had other priorities, mainly
as a result of inward investment. The result was that the need
for Wales to have a thriving number of new businesses in the key
growth sectors of manufacturing and service industries was frankly
neglected and received little or no publicity. All the emphasis
has been on inward investment success.
5.4 There are today a plethora of organisations
involved in business start-ups—the TECs, Business Connect,
Enterprise Agencies, even local authorities, and so on—all
operating independently, some in competition with each other and
with no coherent, strategic framework. The Economic Powerhouse
should provide both the framework and arouse the country for the
need for more new businesses in key growth sectors of the next
decade.
5.5 However, it is not sufficient to argue for
a "strategy" for Business Birth-rate: there is a need
for an Action Plan. New, successful, growing enterprises are not
established by local authorities—although these can materially
assist in providing valuable support and in making suitable land
available.
5.6 The entrepreneurs with a determination to
set up their own businesses come from a variety of backgrounds
and have a range of motivations. Identifying people, promoting
opportunities, ensuring that the financial infrastructure works
in support of this great objective of creating new businesses
in Wales will not be an easy task. But it is one which is crucial
to the future prosperity of Wales.
FINANCE FOR
SMALL FIRMS
6.1 Business should be about fair competition,
and ensuring that those who take the biggest risks are rewarded
with the profits. It should not be about political advantage,
solving social deprivation or about creating employment: businesses
exist to make a profit for those who own and manage them. The
latter points are much-needed spin-offs from successful businesses.
6.2 This is something which politicians may
not be keen to hear, but it must be unequivocally recognised that
the way to create jobs is to help businesses grow and become thriving
entities. They need to be encouraged, not regulated, and supported
wherever possible.
6.3 Small businesses in Wales are no different,
and a culture change by investors is needed to maximise the potential
of many entrepreneurs to create these vibrant new companies.
VENTURE CAPITAL
7.1 FSB Wales has been greatly encouraged by
the record level of venture capital pouring into Welsh firms,
and wants to see this as a fertile area that the enhanced WDA
can concentrate on. It is vital that Wales reaches the same level
of fund-raising through venture capital as the USA if small firms
here are going to have the same success.
7.2 The latest survey by the British Venture
Capital Association showed that investment through venture capital
had reached an all-time high in 1997, as £4.2 billion was
invested in 1,272 firms throughout the UK, with investment activity
and spending almost doubling in Wales.
7.3 To find out what Britain will be doing in
10 years, so the saying goes, look at America today. If the saying
holds true, then small businesses should be rubbing their hands.
7.4 For example, small firms in California,
unlike Germany and Japan, are free of dominance by big banks and
big corporations. The state now has one of the largest economies
in the world, surpassed only by the US itself, Japan, Germany,
France, Britain, Italy and China.
7.5 California is now the place to start
a business, especially if it deals in expert knowledge. The state
has created more than 400,000 new jobs between 1996 and 1997 without
even trying to replace the 200,000 lost from the older industries.
7.6 It has been estimated that another 1.2 million
jobs will come to the area before the end of the century, many
of them highly paid. All this, we must remember, is in the land
of the micro start-up. Of almost 750,000 businesses in California,
more than half have seven employees or fewer.
7.7 In 1996, venture capitalists invested more
than $2 billion in small companies located in `Silicon Valley'—the
narrow strip of coastal territory to the south of San Francisco.
It currently houses around 6,000 high-tech businesses. They have
a greater turnover than the whole of Chile.
7.8 The Californian model of venture capitalism
is an extremely important one for Wales to look at. Future business
development will rest not so much with nations, or with individual
companies, but with mutually supportive networks.
7.9 Look at UK success in motor sport, biotechnology,
computer games and financial products. All have built up around
highly supportive networks of mainly tiny companies.
7.10 The key point is that they play a varied
game, sometimes collaborating, sometimes competing. Wales has
more entrepreneurial flair and experience in small companies than
most European countries.
7.11 There is no secret to this brand of American
business success: American culture loves new things, and US companies,
even small ones, are used to being able to reach a colossal home
market. Business people in America have great confidence and tremendous
tolerance of risk.
7.12 What investors in Wales must be encouraged
to do is simply be less defensive: decisions to invest are often
made entirely on past performance, either of a company or of its
people. And operation of the investment is sometimes supervised
by the nominees of a bank.
7.13 Knowing the limits has worked well in California.
There are a multitude of investors looking for opportunities in
start-up businesses. One venture capital company reports it provided
$1 billion over two years to help get 250 new ideas off the ground—a
careful spread of risk. Some ventures failed, but it now has a
stake in business worth more than $85 billion, with revenues totalling
$4 billion a year. This is not a freak event: one in 20 Californian
companies has revenues growing by 20 per cent a year, or more.
7.14 California also gives the lie to the notion
that business success and exploitation inevitably go together.
Workers and managers in small companies are actively encouraged
to take a stake in the business and there are tax breaks to encourage
them to do so. Many companies routinely offer share holdings in
lieu of performance bonuses. In the new high-tech companies, employees
are far more likely to boast of the size of their equity share
than of their wages.
7.15 Californian experience has shown how employee
participation can prolong the active life of a company. As founders
tire and move on, renewed energy flows in from senior employees
who are genuinely committed to its future.
7.16 Both Wales and California have realised
the importance of international trade and, compared with the rest
of Europe and Japan, Wales has an open culture that can foster
difference and creativity. Both face a once-and-for-all chance
to develop new service and knowledge-based industries: publishing,
entertainment, multimedia, Internet services, software, information
systems, biotechnology, environmental services; inventing, designing
and developing the products of creative minds driven by the joy
of doing something new every day.
7.17 A new open, confident Welsh economy, built
on the efforts of risk-tolerant business investment and a belief
in the creativity of its workforce, could see Wales as an example
to the rest of Europe.
OTHER FORMS
OF FINANCE
8.1 As we have seen above, venture capitalists
in this country are notoriously reluctant to fund even comparatively
low-risk technological innovation. Many projects simply do not
proceed without the intervention of the Smart scheme, which provides
grants for small and medium-sized companies to carry out feasibility
studies. Until there is a culture change, this scheme will remain
an important tool for small businesses, and needs to be given
a higher profile.
8.2 Another scheme that should be looked at
is the establishment of a Development Bank for Wales, to concentrate
solely on the funding of indigenous businesses. This would need
sufficient capital to support innovation in small firms in Wales
on similar terms enjoyed by those in other European countries.
8.3 With the exception of Ireland, Luxembourg
and the UK, other EU member states have equipped themselves with
development banks whose mission is to mobilise long-term finance.
Many small businesses currently find borrowing money over the
medium-term impossible because either the banks do not offer such
facilities, or the repayment conditions place an excessively heavy
demand on cash-flow.
8.4 A Development Bank for Wales would ensure
a greater degree of certainty that borrowing terms will not be
affect by cyclical factors, such as inflation, recession or a
housing market slump. Business owners would therefore be allowed
to implement their business plans more effectively as outside
influences would remain largely irrelevant.
AN EXPORT
PROMOTION BOARD
9.1 To market high-quality indigenous businesses
effectively, and to help them market themselves, Wales needs to
establish an Export Promotion Board. At the present time, we simply
have a few civil servants in the Welsh Office trying to promote
overseas trade opportunities.
9.2 Yet export promotion should be the key to
expansion of businesses and the Welsh economy alike, because it
produces additional economic activity over and above local inter-trading.
In the Far East they do this through Trade Development Centres
equipped with researchers, international databases, advisers,
publications, as well as trade missions. The Hong Kong Development
Centre is one of the most advanced and successful in Asia.
9.3 The Economic Powerhouse should consider
establishing a unit to deal with this, which should be properly
resourced. Only then could we begin to compete with EU member
states such as France, Belgium and the Netherlands which are as
effective exporters as the Far Eastern nations.
CONCLUSIONS
10.1 Small indigenous high-quality businesses,
with an emphasis on the service sector, is the way forward for
the Welsh economy. A Business Birth-rate strategy should be developed
to encourage start-ups: an important tool in this is Venture Capitalism,
which requires a culture change by investors that should be promoted
by the WDA.
10.2 Many businesses are still unhappy with
the services received from the business support organisations,
and there is still believed to be no clear source of information
on all business support services or funds.
10.3 However, the attitudes of the WDA and TECs
are changing. There is an overall acceptance that developing innovative
indigenous businesses and promoting exportation by SMEs should
be the new focus. Over 80 per cent of the workforce of Wales work
in companies of 100 employees or less: the potential of small
firms is at last starting to be realised.
10.4 But the challenges facing the Welsh economy
remain great. There is still a GDP gap of nearly 20 per cent between
ourselves and the European Union average. Business organisations
and public bodies will have to work in partnership to overcome
this, and FSB Wales needs to be recognised as the foremost group
representing small businesses in the country by these bodies.
We must all work together for the good of Wales' future.
Russell Lawson
Wales Parliamentary Officer
26 May 1998
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