Select Committee on Treasury Written Evidence

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 and competitiveness.

  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 do so.

  I hope you find our contribution useful. We would be pleased to discuss any of our proposals in more detail with you.


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 SME sector.

  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 and opportunities.

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 and retail.

  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.[47]

  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 scale.

  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.[48]



  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.

Promoting innovation

  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%[49] 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 given.[50] While this is very positive, in a recent survey of its manufacturing members[51] 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 demand—more emphasis on commercial application needed.

    —  Make use of research expertise in universities—marry 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).[52]

  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 rule breaches."[53]

  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 bring.

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 themselves—they 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 of SMEs.

Clive Davenport

Trade and Industry Chairman

May 2006

47   Lifting the Barriers To Growth, 2000, 2002, 2004, 2006 Back

48   Lifting the Barriers to Growth, 2006, p 40 Back

49   DTI, 2005 figures Back

50   DTI and HM Treasury (2005): R&D Intensive Businesses in the UK, DTI Economics Paper No 11 Back

51   December 2005 Back

52   "Better Regulation-is it better for business?", written for the FSB by Professor Rob Baldwin, LSE, p 8 Back

53   Inspector at the Door 2005, written for the FSB by Prof Robert Baldwin, LSE and Richard Anderson, Corporate Risk Group, p 27 Back

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