Memorandum from the Department of Trade
1. Although the UK has strong financial
markets and debt finance is accessible to most businesses, SMEs
can still face particular difficulties in obtaining the appropriate
finance. It is for this reason that most Government financial
interventions are targeted at SMEs. In the EU as a whole, according
to the Green Paper: Entrepreneurship in Europe: "The risk
capital market is under-developed and banks increasingly avoid
2. Financial incentives in the form of R&D
tax credits were introduced in 2000 and are available to small,
medium and large companies. Small or medium companies receive
an extra tax deduction of 50 per cent on qualifying R&D spending
over and above the normal 100 per cent deduction they would get
under the normal rules of the tax system. This equates to nearly
a 10 per cent subsidy for a company paying corporation tax at
19 per cent. Additionally SMEs making a loss can surrender the
credit for a cash payment.
Large companies get a 25 per cent credit instead
of 50 per cent and cannot surrender losses. This is equivalent
to 7.5 per cent subsidy for a company paying corporation tax at
the main rate.
Designs of the new credits were heavily influenced
by consultation, and the Government continues to work closely
with business on ways of improving the understanding and delivery
of the credits. Budget 2003 announced further improvements to
both the large company and SME schemes as well as a consultation
on improving the definition of R&D used for tax purposes.
3. Additionally, the UK offers financial
support for incubators, as, along with many other governments,
we recognise the value of business incubation in helping business
start-ups survive and grow. Funding support is therefore given
to help increase the supply of incubators, although the SBS Business
Incubation Fund is currently undergoing a European Commission
Article 88(2) full state aid procedure. The SBS co-sponsors UK
Business Incubation (UKBI) and the UK Science Park Association
(UKSPA) for the development of best practice and networking. Through
UKSPA the SBS is supporting research into the quality and impact
of Science Parks in the knowledge-based economy and the final
report is due in October 2003.
4. What are the main programmes or schemes
in the UK (EU)?
UK High Technology Fund
Regional Venture Capital Funds
Small Firms Loan Guarantee Scheme
5. Are the objectives of these programmes
The programmes highlighted above, which are
operated by the Small Business Services, aim to address a recognised
market weakness in the provision of finance to SMEs. In developing
them, the SBS has worked closely with existing financial providers
and benefited from the advice of the independent Small Business
Investment Taskforce. Intermediaries are required to provide regular
monitoring reports and programmes are subject to periodic evaluation.
6. Do the programmes clearly identify
the annual costs and benefits in each case? What are they?
Under the Business Support Reviewall
new products will have clearly identified costs and benefits.
SmartAnnual cost is £30
million for which beneficiary businesses generate estimated £500
million additional turnover and £270 million additional exports.
UK High Technology Fund/Regional
Venture Capital Funds (RVCFs)Costs: programmes are cost-neutral,
ie Government gets its money back as well as cost of capital.
If all nine RVCFs and High Tech Fund fail, the cost to Government
is around £100 million. Benefits around £396 million
are available for investment in SMEs with growth potential.
Small Firms Loan Guarantee SchemeAnnual
costs vary as they depend on the level of claims against guarantees
but they are currently around £40 million. Benefits: since
1981, over 83,000 loans with a value of around £3.2 billion
have been made to SMEs.
7. Which, in your view, are the most
effective programmes currently? Why is this?
It is not possible at this stage to give a definitive
view on which of the above programmes are most effective. Each
programme is designed to address a specific need, which makes
the issue of direct comparison difficult. This is because the
level of intervention required to achieve the same outcomes varies
according to the needs being addressed and the methods of evaluating
additional outcomes associated with each programme also vary.
There are also issues relating to evaluations not being undertaken
at the same time, namely adjusting results so that they are comparable
and taking into consideration the wider economic environment.
The Small Business Service is committed to a
more strategic approach to evaluating the programmes it manages,
in that it will be evaluating programmes with similar aims either
as part of a single over-arching evaluation or in parallel to
ensure greater consistency in approach and comparability in terms
of timing. This financial year SBS programmes relating to encouraging
enterprise in less advantaged areas and underrepresented groups
are being evaluated in parallel which will give the SBS the opportunity
in April 2004 to review the effectiveness of the total SBS offering
on this strategic theme. Plans are being worked up on other strategic
themes as part of a three-year strategic research and evaluation
8. What improvements to existing programmes,
or what new programmes of support, do you consider desirable and
All DTI Business Support schemes have come under
review. The objective of the programme has been to create new,
broader, more flexible products that focus on driving up productivity.
With specific reference to the schemes mentioned above, details
are as follows:
Smart as a whole has been subject
to the DTI review of business support, which has recommended that
the research and development elements be built upon to create
a new "R&D Grant for SMEs" product. Some improvements
will be made to grant rates and sizes. A new product, "Grant
to prepare your business for innovation", will be launched
on 1 June 2003, initially as a two-year pilot.
Regional Venture Capital Funds and
the UK High Technology Fund are 12 to 15 year funds and have only
recently been launched.
Changes to the Small Firms Loan Guarantee
Scheme were announced in November 2002 and introduced on 1 April
2003. They include a single guarantee rate, the removal of exclusions
from certain industry sectors and a change in the premium paid
by borrowers. The SBS is also looking to add to the list of approved
scheme lenders. The aim is to simplify the operation of the Scheme
at the same time as opening it to more SMEs.
New Programmes: Early Growth Funds
are being created in each Region to provide small amounts of risk
capital to growth-oriented SMEs and we are about to issue a consultation
paper on a new programme based on the United States Small Business
Investment Company (SBIC) programme. The SBS is also testing ways
of helping more SME entrepreneurs to become "investment ready"
through a small number of demonstration projects, with the aim
of developing a national programme.
9. The multi-annual programme (MAP) supports
a number of financial measures including:
the ETF Start-Up facility: this makes
investments in venture capital funds established specifically
to provide equity or other forms of risk capital to SMEs, in particular
those operating at a regional level, those focussing on specific
industries or technologies and those that exploit R&D results.
It has recently been adapted to support the establishment and
financing of start-ups by providing support for specialised VC
funds and incubators;
the SME Guarantee Facility: this
operates by increasing the capacity of guarantee schemes in Member
States and aims to increase the availability of debt finance for
SMEs, particularly for micro-enterprises, start-ups and innovative,
fast-growing businesses; and
the Seed Capital Action Plan: this
is intended to support seed funds, incubators or similar organisations
in which the EIF participates. It is aimed at the long-term recruitment
of additional investment managers to reinforce the capacity of
the venture capital industry to invest in seed capital.
10. Benefits to UK Business: At year-end
2001, total disbursements to VC funds through the ETF Start-Up
Facility amounted to
50 million. At 31 December 2001, the VC funds had
invested a total of
184.6 million in 179 SMEs, including
15.4 million (8 per cent) in 11 beneficiary SMEs
(6 per cent) in the UK. This compares with a total invested in
2001 by members of the British Venture Capital Association (BVCA)
in UK high-tech companies of £1,658 million. These figures
suggest that the ETF Start-Up Facility invested
124.7 million in UK SMEs, which equated to about
18 per cent of total VC operations in that year.
The Small Firms Loan Guarantee Scheme (SFLGS)
operates on a national level. The majority of the UK clearing
banks are lenders under the scheme and most provide guarantees
to a comprehensive range of SMEs. As SFLGS is demand-led, the
EIF early on took the view that it would be difficult to accommodate
it within the SME Guarantee Facility's "additionality"
principle. However, under "new" MAP, it is possible
that this could now be re-considered and the UK could also take
advantage of the guarantees for micro-credits. Exploratory discussions
have taken place on these issues between the EIF and the Small
Support for the recruitment and training of
new investment managers under the Seed Capital Action plan seems
a very worthwhile activity and we are aware that some UK fund
managers, including one of the Regional Venture Capital Funds,
have used this facility.
11. The sixth EU Framework Programme (FP6)
was launched in Autumn 2002 and is the European Union's main instrument
for the funding of research in Europe. With a total budget of
17.5 billion, FP6's objective is to encourage improved
collaboration in research and exploitation of knowledge. As in
previous Framework Programmes, there will be significant participation
by SMEs. 15 per cent of the
11.285 billion budget allocated to seven priority
thematic areas of research covered by FP6 will be taken up by
SMEs. In addition, another
430 million will be specifically set aside for activities
involving SMEs covering other areas of research. FP6's administrative
procedures are intended to be simplified, streamlined, and increase
efficiency and flexibility, thereby increasing its attractiveness
In the FP5 programme there was a close link
between innovation and SMEs. This is less obvious now, however,
there is some element of service for SMEs in the separate Research
& Innovation Programme, mainly via Innovation Relay Centres
and Economic and Technological Intelligence projects. UK SMEs
have also been involved extensively in earlier Framework Programmes.
12. The Small Business Administration provides
financial, technical and management assistance to help Americans
start, run and grow their businesses. It is the nation's largest
single financial backer of small businesses, with a portfolio
of business loans, loan guarantees and disaster loans worth more
than $45 billion, and a venture capital portfolio of $13 billion.
The Manufacturing Extension Partnership, a nationwide
network of over 400 local centres, offers technical and business
assistance to smaller manufacturers. Business Angels are a widespread
13. The DTI Business Support Review identified
the need for government to greatly simplify its support services.
The DTI will, therefore, close its existing schemes and replace
them with a limited number of products designed to:
Encourage a higher number of planned
new business starts;
Strengthen productivity and competitiveness
of start-ups and small firms;
Increase innovation activity; and
Increase ability of businesses to
access and exploit leading edge knowledge.
14. What are the current programmes or schemes
in the UK (EU)? The three main SBS support services CONNECT, Benchmark
Index and Inside UK Enterprise, which are linked in a logical
progression, each address a particular aspect of best practice.
These are aimed primarily at SMEs and can make a valuable contribution
to an improvement of their competitive performance and growth.
The Industry Forum Adaptation is a scheme, whose objective is
to establish sectoral partnerships which are supported by DTI.
In addition to schemes targeted at business,
the Government has in place a range of schemes aimed at improving
commercialisation from the science base more broadly, these include
Science Enterprise Challenge and University Challenge. Science
Enterprise Challenge provides access to entrepreneurial training
for scientists and engineers within universities (both staff and
students), whereas University Challenge provides seed funding.
Although these schemes are focused on encouraging entrepreneurship
and exploitation in universities, a beneficial side effect might
be provision of entrepreneurship training for people who subsequently
take up posts in large companies, for whom intrapreneurship might
then be a viable option.
15. Are the objectives of these programmes
The common theme running through each of the
SBS best practice services is the adoption of business excellence.
The SBS's three best practice programmes, facilitated by knowledgeable
business advisors in support organisations, provide a solid grounding
for SMEs to improve their performance and growth, and make a very
worthwhile contribution to the UK's competitiveness position.
The objective of the Industry Forum Adaptation is to transfer
skills at the workplace using proven best practice tools and processes
that deliver sustainable improvements in performance and productivity.
16. Do the programmes clearly identify
the annual costs and benefits in each case? What are they?
CONNECT is a series of interactive
"international award winning" best practice modules
(available on CD-ROM and from the CONNECT website) designed to
be used as an advisory tool by business advisors/intermediaries
(over 16,000 this year saw a CONNECT module). As a business-to-business
tool based around "real-life" filmed documentary case
studies, CONNECT acts as a wake-up call to SMEs, resulting in
companies adopting a "next steps" action (over 70 per
cent and reporting annual savings/increased profits of nearly
£6 million), therefore having a positive impact on the productivity
of organisations experiencing a CONNECT presentation (source:
independent impact assessment report December 2002).
CONNECT currently consists of a series of 24 programmes
and apart from delivering knowledge transfer to meet DTI and SBS
objectives, CONNECT also performs the same task across Whitehall,
as a key component of supporting best practice programmes to SMEs.
Benchmark Index is a facilitated
performance measurement service helping SMEs to implement business
improvement polices and strategies in order to increase profitability
and productivity and achieve competitive advantage. In total the
improvements in profit following use of the Benchmark Index is
estimated at £8 million a year.
The Benchmark Index is the largest service of its
type in the world and has been used as the measurement tool in
an EC backed project that benchmarked over 1,500 small businesses
in nine member states. The service is fully facilitated by trained
advisers from a wide range of business support organisations,
including Business Link Operators, Trade Association, Best Practice
programmes, private consultants, etc. 70 per cent of medium sized
users of the benchmark index had taken action or planned to take
action to implement their business.
Inside UK Enterprise facilitates
the transfer of management knowledge and experience from selected
host (exemplar) companies to other managers (visitors) wishing
to improve the performance of their own business. In the last
year 93 per cent were either satisfied or extremely satisfied,
with 45 per cent had made changes to their business following
an IUKE visit.
IUKE main function is to deliver knowledge transfer
to meet SBS objectives but it performs the same function for Partner
organisations as a key component of their own best practice programme
content. Partners include Fit for the Future (CBI), Farm Business
Advisory Service (DEFRA), Construction Best Practice Programme
(DETR), Health and Safety Invest to Save (HSE and Social Enterprise
(Phoenix Fund). Impact assessment has evidence of customer profit
increase of £11 million resulting from long and short-term
improvements initiated by use of IUKE.
For the Industry Adaptation Forum,
a typical DTI intervention is £1.5 million over three to
five years, which represents 40 per cent of the total project
cost with regard to benefits, these range according to the sector,
but typically 20 per cent improvements in value added per employee
17. Which, in your view, are the most
effective programmes currently?
Why is this? As stated previously, each programme
is designed to address a specific need, which makes the issue
of direct comparison difficult. For the three SBS programmes outlined
therefore: CONNECT provides awareness to SMEs; Benchmark Index
is the opportunity to measure performance; and IUKE offers the
opportunity to see best practice in action. These services are
also effectively working together in providing workgroup seminars
and establishing a one-stop shop for the knowledge base inherent
in the three services. This approach provides a favourable comparison
to providing individual services, together the services offer
an impact of £25 million profit increase to SMEs from a programme
budget of £2 million.
18. What improvements to existing programmes,
or what new programmes of support do you consider desirable and
The fundings of the Business Support Review
in the area of skills have been fed into the ongoing work of the
Innovation review within the DTI and the wider Skills Strategy
development within DfES. These are expected to report back during
the summer, and their findings will then be examined to build
up any new programmes of support that might be desirable.
BY THE GOVERNMENT/THE
19. Ensuring a co-ordinated approach to
entrepreneurship policy at EU and Member state level is a key
UK objective. At one level, co-ordination takes place through
the Multi-Annual Programme's enterprise projects, which identify
and exchange best practice in the various spheres of enterprise.
However, entrepreneurship policy is a Member State competence,
and the role of the EU is largely focussed on best practice and
ensuring that Member States get the most from sharing the message
of co-ordination. The creation of the Competitiveness Council
was an important step towards an integrated approach to policy
development and delivery.
20. Following the review of DTI Business
support, the Department is looking at how it can better align
its products with those of other government players and the EU.
All proposals for new products will need clearly to indicate how
they complement the wider government (and EU) picture. A new framework
is also being established with GO colleagues, which will result
in greater match funding and co-financing (ERDF). Further, we
are working with RDA colleagues to identify ways to create a more
coherent DTI/RDA business support product mix.
21. The Green Paper identifies the importance
of intrapreneurship, also known as "spin-offs", in which
opportunities resulting from R&D or innovation in large firms
are exploited by (former) employees. Although intrapreneurship
exists in the UK, most examples of it occur within companies and
so go unrecorded and unobserved. If there is reticence on spinouts,
it is more likely because the firm feels guilty about downsizing,
or embarrassed at discarding a business which is subsequently
successful. There are no specific government support measures
of policies to promote intrapreneurship.
Nigel Griffiths MP
Parliamentary Under-Secretary of State for Small
9 April 2003
4 Green Paper: Entrepreneurship in Europe, European
Commission, 2003. Back