Memorandum submitted by the Federation
of Small Businesses
The FSB is the UK's leading non-party political
lobbying group for small businesses. It exists to promote and
protect the interests of all who own and/or manage their own businesses.
With over 195,000 members, the FSB is the largest organisation
representing small and medium-sized businesses in the UK.
We welcome the opportunity to respond to the
Treasury Committee inquiry into globalisation.
Globalisation presents both opportunities and
challenges for the small business sector. For example, with growing
use of technology and cheaper transport, small businesses can
now reach more diverse geographical markets. On the other hand,
with cheaper imports and greater competition from abroad, many
small businesses face significant challenges in terms of productivity
The FSB believes that the UK economy will need
to make significant adjustments to tackle the challenges that
globalisation brings, but that there are also great opportunities
that can be seized and small businesses must be encouraged to
I hope you find our contribution useful. We
would be pleased to discuss any of our proposals in more detail
The nature of globalisation and its overall impact
on the UK economy
1. The FSB believes that globalisation has
a beneficial effect on the UK economy, but that the transitional
changes the economy faces will also create significant challenges
for certain sectors of the economy.
2. Of the 4.3 million businesses in the
UK, over 99% are small and medium-sized enterprises (SMEs). SMEs
employ 12 million people (58% of private sector workforce) and
their turnover equals 50% of GDP.
3. The discussion of globalisation often
focuses on the opportunities it presents in terms of reaching
new markets. However, FSB research shows that the majority of
SMEs serve local, regional and national markets. Only 22% of members
export to the EU area, 11% to non-EU Europe and 17% to the rest
of the world.
4. Similarly on the e-business side, while
80% of FSB members have access to the Internet and use e-mail,
as only 18% of members sell online and 20% buy online. Although
the majority of SMEs have access to computers and basic technologies
such as the Internet and e-mail, there appears to be little leveraging
of e-business benefits to reach international and even national
markets. This represents both opportunity and challenge for the
5. SMEs tend to employ local people, serve
local markets (48% of FSB members serve local markets within a
50-mile radius) and put money back into the local economy. For
many of these businesses, globalisation is a relatively abstract
phenomenon and FSB research shows that the small business sector
is not fully leveraging the benefits and opportunities that globalisation
brings. There is also strong anecdotal evidence to suggest that
SMEs are fearful of the challenges that globalisation brings and
it is evident that they are not fully leveraging the benefits
The opportunities and challenges which globalisation
presents for the UK
6. From the SME perspective, globalisation
brings significant challenges for in terms of competitiveness
and productivity, particularly in sectors such as manufacturing
7. Manufacturing has been in decline in
the UK for a relatively long time, this is reflected among the
small business sector. The number of manufacturers in the FSB's
membership has been declining steadily since 2000 from 12.2% in
2000 to 11.4% in 2006.
8. On the retail side, traditional retail
structures have been eroded by mass consolidation of the retail
sector. The globalisation process has contributed to this through
some extent through the implementation of sophisticated logistics
and distribution systems, cheaper international transport and
significant economies of scale, particularly on an international
9. The growing trend for consolidation and
international operations to maximise profit leaves the small retail
sector under great financial strain: a significant 34% of FSB
members in the retail industry reported a decline in turnover
and 36% reported a decline in profits.
10. The Government's domestic policy response
to globalisation has been one of exploiting niche markets and
putting significant emphasis on high investment in R&D, education,
innovation, in order to create an economy which can compete internationally.
11. However, from the SME perspective, there
are strong anecdotal perceptions that these initiatives may not
always benefit the groups that they are intended to. There seems
to be little concern for the challenges facing micro businesses:
government initiatives are often good in theory, but badly targeted.
12. 64% of commercial innovations come from
SMEs and 50% of FSB members believe that their specialised expertise
and products are significant competitive strengths. From an SME
perspective, recent government policies on innovation have concentrated
on promoting the message of the importance of innovation to SMEs
and encouraging this through initiatives such as the R&D tax
credit. However, it is difficult to assess how useful central
government messages about innovation are. The information tends
to only reach a small proportion of the SME community and even
then may not be the most appropriate.
13. Although SMEs have great innovative
capacities, and are responsible for bringing 64%
of commercial innovations to the market, there is little exploitation
of the possible benefits of globalisation from this industry sector.
Research and development
14. The FSB is disappointed that the UK
plans to reach a 2.5% GDP investment in R&D by 2010, rather
than the EU goal of 3%. At the moment, investment stands at 1.9%
GDP. Although ahead of some EU Member States (eg Portugal), this
is still well behind investment by Sweden and Finland; both aim
to reach 4% investment levels by 2010.
15. The Government makes much of the benefits
that its R&D tax credit has brought business and that so far,
17,000 claims have been made with over £1.3 billion of support
While this is very positive, in a recent survey of its manufacturing
the FSB found that a 65% were not aware of the R&D tax credit.
16. We consider that in order to create
a sustainable and competitive economy for the 21st century, policy
makers and businesses must be encouraged to emphasise the practical
exploitation of R&D. Our suggestions for this are:
Retroactive funding for R&D projects.
R&D driven by industry demandmore
emphasis on commercial application needed.
Make use of research expertise in
universitiesmarry universities and the marketplace in a
more appropriate manner.
Increase awareness of funding streams
available to SMEs for R&D.
The revised Lisbon Agenda for Europe
17. The Lisbon goals paved the way for a
major recognition of the importance of SMEs to the EU economy.
However, six years after the Lisbon Agenda was introduced, it
has been revised and we have yet to see evidence of real change
taking place. We are concerned that EU initiatives are not linked
closely enough with each other, for example, there ought to be
greater links made between FP7 (financial plan 7), the Lisbon
Agenda, the EU Action Plan on Entrepreneurship and the recently
introduced Globalisation Adjustment Fund.
Outsourcing by UK businesses
18. Outsourcing represents a way of efficient
cost-saving for UK businesses, but also significant challenges
in certain sectors. There is strong anecdotal evidence to suggest
that SMEs are concerned about outsourcing in terms of a possible
loss to their business. One manufacturing member recently lost
30% of his business as the business he supplied decided to outsource
overseas. One of his manufacturing colleagues, who also supplied
the same UK business, had to close his business down altogether.
Design and level of business taxation
19. The tax treatment of small businesses
is relatively generous by European standards. However, we are
concerned that the current tax system is too complicated and in
need of radical simplification. The FSB firmly believes that the
tax system should only be used to raise Government revenue, not
to deliver the Government's social policies.
Reducing the burden of business regulation
20. Reducing the regulatory burden is a
key objective for the FSB. The regulatory burden has a significant
impact on small businesses, and over 50% of FSB members are dissatisfied
with the volume and complexity of regulations. FSB figures also
show that the burden of small businesses from regulation is five
times higher than that of large businesses (employing 250 or more).
21. One FSB member said the following about
the current regulatory environment:
"Large organisations have the resources
to deal with meeting compliance, which we do not have. They are
also better placed because of their financial strength to pass
on the costs of compliance to their customers. Their greater resources
enable them to deal more easily with any complaints or potential
22. The inspection and enforcement regime
are also perceived as burdensome and over 40 new statutes that
provide for entry and seizure have been introduced since 2000.
This is clearly a great cause of concern for small businesses.
23. We welcome the Government's drive to
promote the principles of better regulation and simplified legislation
following the Hampton Review and Better Regulation Task Force
reports. We are working closely with central government departments
to ensure the best possible outcomes for SMEs.
24. A good example of the Government's support
for a better regulation agenda, can be seen in the draft EU Services
Directive. The FSB has been very supportive of this directive,
as we believe that it will reduce some of the barriers to overseas
trade that small businesses currently experience and therefore
encourage SMEs to trade across EU borders.
25. It is possible to connect the issue
of globalisation and regulation in the sense that, from a small
business perspective, less or better regulation may prompt SMEs
to trade across borders, eg the Copenhagen Economic Group study
on the possible benefits of the Services Directive found that
implementing the Services Directive would increase jobs by 600,000
and GDP would increase by 3% across the EU Member State area.
It is important that regulation does not penalise SMEs, but rather
enables them to embrace the opportunities that globalisation can
Training and acquisition of skills
26. Recruiting skilled staff and skill shortages
among existing staff is a significant problem for small businesses.
Alarmingly, some of the most problematic areas are generic skills
such as numeracy and literacy. This clearly has a significant
impact on the business' performance and ability to expand, but
also on the UK economy as a whole. With increasing competition
from abroad, it is crucial that the UK's work force has the necessary
skills to compete and deliver results.
The supply and pricing of energy
27. With the UK fast becoming a net energy
importer of gas, the implications of increased dependence on gas
imports will be significant for small businesses. It will be essential
for the Government to safeguard national interests and seek to
combat the levels of volatility in pricing levels experienced
in recent months. Small businesses need certainty and the spate
of energy price hikes over the last year has had a significant
and negative impact on small businesses especially in relation
to cash flow and their ability to plan.
28. The FSB has for some time campaigned
for recognition of the special position of small businesses who
behave in a similar way to domestic energy users, in terms of
lack of expertise and levels of energy consumption; but do not
enjoy the regulatory safeguards that domestic users receive. The
current debates on security of supply and pricing comes at a time
when small businesses are under particular strain in a volatile
energy market and this is coupled with unclear pricing policies
and poor standards of service from some gas and energy suppliers.
29. Globalisation is bringing new and exciting
challenges to UK businesses. SMEs underpin the UK economy and
create sustainable local economies by employing local people and
putting money directly back into the local community. But most
SMEs remain local and should be encouraged, if appropriate, to
embrace the opportunity of globalisation in terms of exploiting
new markets and trading partners.
30. The figures of low export and low take-up
of e-business speak for themselvesthey present an opportunity
to the Government, which needs to maintain the local, successful
community whilst simultaneously exploiting the phenomenon of globalisation,
starting with more appropriate policies tailored for the benefit
Trade and Industry Chairman
47 Lifting the Barriers To Growth, 2000, 2002, 2004,
Lifting the Barriers to Growth, 2006, p 40 Back
DTI, 2005 figures Back
DTI and HM Treasury (2005): R&D Intensive Businesses in
the UK, DTI Economics Paper No 11 Back
December 2005 Back
"Better Regulation-is it better for business?",
written for the FSB by Professor Rob Baldwin, LSE, p 8 Back
Inspector at the Door 2005, written for the FSB by Prof
Robert Baldwin, LSE and Richard Anderson, Corporate Risk Group,
p 27 Back