Progress | Centre-left Labour politics

Unleashing growth: An industrial strategy for SMEs

Small businesses need to be at the heart of any progressive government, argues Joe Dromey

Small businesses are the lifeblood of our economy. 5.5 million small and medium sized enterprises (SMEs) provide 60 per cent of private sector jobs and half of the United Kingdom’s gross value added (GVA). When small businesses thrive, Britain thrives because small businesses do not offshore profits to tax havens; they tend to spend them in the local economy in which they are based, benefitting the local community in which they are rooted.

But small businesses in the UK face big challenges. In Prosperity and Justice, the final report of the IPPR Commission on Economic Justice, we set out six challenges for SMEs, and the outlines of an industrial strategy to unleash SME growth.

First, we urgently need to boost productivity across our economy, and in SMEs in particular. Our challenge is not a lack of high productivity firms; we have many. It is one of diffusion of transformational technologies across the long-tail of low productivity employers. So we’ve called for a new social partnership body – Productivity UK – which would provide business advice and support, as well as direct grants to businesses to invest in technology and innovation, job design and training.

Second, SMEs need access to finance to grow. While lending to SMEs has recovered since the crash; this has been driven entirely by lending to medium-sized firms. Small businesses have continued to pay back more than they are lent. So we have called for a national investment bank (NIB) to support investment in infrastructure, innovation and business development. The NIB should provide both long-term patient capital to SMEs as well as the potential to take an equity stake. We have also called for the NIB to offer innovative start-ups a ‘first customer’ guarantee which can reduce risk for subsequent customers and help businesses get off to a flying start.

Third, we need to support SMEs to invest in skills. Small businesses are more likely to have unfilled vacancies due to skills shortages, but they are less likely to provide training. The apprenticeship levy will do little to boost investment by SMEs as it only applies to firms with payroll of £3 million. So we should consider expanding the levy, but giving employers greater flexibility, and we should establish strong sectoral institutions to oversee the skills system, with representation from SMEs.

Fourth, we also need urgent action to tackle late payments. 12 per cent of SMEs have to wait over 90 days to get paid, with two in five having cash flow difficulties as a result. Commercial factoring can be costly, so we have called for a national factoring agency to help SMEs improve their cashflow at low cost.

Fifth, we need to recognise the huge potential of public sector procurement to drive inclusive growth and to support SMEs. Across the public sector, we spent £268 billion on goods and services in 2015; equivalent to 14 per cent of growth domestic product. But too much of this went to large outsourcing companies, with far too little of that cash going to workers and circulating in local economies. So we should build on the community wealth building approaches, where local authorities bring together anchor institutions to ensure that local SMEs can access their procurement.

Finally, we need to ensure that – whatever happens in the next few months – we do not get a Brexit deal that is bad for small businesses. While some talk up the prospect of new trade deals with distant and small economies, the clear priority for SMEs is ensuring ongoing trade with the biggest single market in the world that sits right on our doorstep – the European Union. We also need to ensure our immigration system does not prevent SMEs from accessing the skilled workers they need.

We need a more ambitious and activist industrial strategy, one which addresses the challenges facing small businesses, and one which unleashes their potential to thrive. Because Britain only thrives when our small businesses thrive.

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Joe Dromey is a Senior Research Fellow at IPPR. He tweets at @Joe_Dromey.

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