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House of Commons

Friday 13 July 2001

The House met at half-past Nine o'clock


[Mr. Speaker in the Chair]

Small Firms

[Relevant documents: The Report and Accounts of the Small Business Service for 2000–01 [HC 104 of Session 2001–02] and the Framework Document for Government Departments "Think Small First".]

Motion made, and Question proposed, That this House do now adjourn.—[Mr. McNulty.]

9.34 am

The Parliamentary Under-Secretary of State for Trade and Industry (Nigel Griffiths): It is a pleasure to open this important Adjournment debate on the need to ensure that our small businesses get to the future first. The Government have an ambition to make the United Kingdom the best place in the world to start and grow a business. Successful businesses are set up and run by enterprising individuals, but the Government shape the environment within which they can do business. The Government therefore have a responsibility to provide the most appropriate support required by our small businesses so that they can compete effectively to meet the challenges of a global economy.

We also have a responsibility to minimise the burdens that are imposed through better regulation and other measures. We have a duty to provide a stable macro- economic environment that allows small business and enterprise to flourish. I want to stress the importance of small and medium-sized enterprises to the economy. It is clear that the SME sector, in terms of job creation alone, is vital to the economy. Nearly three quarters of the increase in employment has come from small and medium-sized firms. In the past five years for which figures are available, more than 750,000 more people were in work. Some 5.9 million jobs were created, and SMEs created 540,000 of the gain. That is 71 per cent. of all the extra jobs created.

UK SMEs have a combined annual turnover of around £1 trillion. SMEs also bring benefits such as stimulating competition, providing a supply chain and developing and exploiting new technologies and niche markets, so there are many reasons for the Government to focus on this sector.

In the industrial economy of the 20th century, large corporations drove economic progress. In the knowledge economy, the drivers of change will be small businesses. In March this year, a Department of Trade and Industry foresight report entitled "Financing the Enterprise Society" was published. The foresight programme is a partnership of Government and business, small and large, which helps all of us to think about the future and helps business get to the future first.

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The report predicts that over the next 10 years small businesses will be the main drivers of economic growth, product innovation and job creation in our economy. There are several reasons for the shift in importance from large to small organisations. First, there is the war for talent. People with knowledge, imagination, creativity and entrepreneurial drive are increasingly impatient with large organisations. They want more freedom, and more control over what they do; they want to own their work, and they want to own the results. Large businesses are trying, sometimes desperately, to strip out their bureaucracies, change their culture and marry the benefits of scale with the benefits of small, but it is a tough thing to do, as we in Government know only too well. Thus smaller and entrepreneurial businesses are finding it easier to attract the people they need.

Secondly, there is the impact of information and communications technology. Increasingly, the use of the internet and e-business is bringing about the death of distance. Ease of access to information will drive down prices and allow the rapid rise of new competitors, leading to increasing globalisation, even by small businesses. The technology revolution in particular is changing the way we live and work—as consumers, as citizens and, very definitely, as business people.

The third reason for the shift from large to small organisations is the speed of change and the need to innovate. That is where small can definitely have its advantages. Around 88 per cent. of all novel innovators—the firms introducing a technologically new or improved product to the market—are SMEs. It is usually much easier for small businesses to change their products. They can change direction quickly, move swiftly into new markets, seize opportunities in new technologies and work in new and innovative ways to achieve their goals. In today's business world, it is not just getting ahead but staying ahead that counts.

We support the growth of the self-employed sector and of small business. We want to make it easier for people to start up on their own account. We are working to achieve that by producing more user-friendly guidelines such as those set out in the Inland Revenue's booklet "Thinking of Working for Yourself?" Already the number of small businesses, including self-employed people, is growing fast—up 170,000 in the past four years. On the basis of the foresight study, we can predict that by 2010 there will be almost 1 million more SMEs—a growth from 3.7 million today to more than 4.5 million. Between them, those businesses will have created 2 million new jobs.

I want to say a few words about the life cycle of small businesses. The numbers understate the scale of the change. I do not have to tell informed hon. Members here that many small businesses do not last. However, that does not mean that they fail. There are many reasons why an owner will decide to close a business, often to start up something else, sometimes to move into employment. New businesses emerge to fill the gaps left by the weakest link, but on present trends, on the basis of the foresight projections, most of the businesses that exist today may not exist in 10 years. But of course their parents are already in business; it is just that most of the 4.5 million businesses that will exist in 2010 have not yet been born.

Start-up and survival rates are critical. Life expectancy for small businesses has improved in recent years, benefiting from a more benign economic environment.

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Almost 130,000 more businesses have started up than have closed in the past three years. More than 1.6 million new businesses have started since April 1997, of which an estimated 900,000 are still trading. The latest survival rates show that more than 88 per cent. of businesses now survive one year after registration, with 61 per cent. surviving three years.

The number of business closures during 1999—382,000—was the lowest in a decade. There were 3,700 company insolvencies in the fourth quarter of 2000. That is much lower than in the early 1990s, when they peaked at almost 16,000 a quarter. Of course, all that is against a background of the longest period of low inflation for more than 30 years and the longest run of low interest rates throughout that period, with rates less than half the level of a decade ago. Long-term rates are now lower than in the United States and in other EU states.

One million more people are now in work, and unemployment is down in every region and nation of the United Kingdom. We are encouraging enterprise and entrepreneurship for all. We need to ensure that we maximise the potential of all our aspiring entrepreneurs. If the United Kingdom is genuinely to become an enterprise society, there is no doubt that more needs to be done to encourage everyone in society to believe that they can really make it in business. That is one reason why the Government established the Small Business Service in April last year.

The role of the Small Business Service is to develop world-class business support services. We are all concerned that small businesses and those who want to start up in business should have easy access to high-quality business advice and support in whatever way best suits them and at every stage of their development. I am confident that all business link partners will have the needs of small businesses uppermost in their minds, and this can be summed up as their commitment to a ruthless customer focus.

Our commitment to social inclusion means reaching the parts that other schemes fail to reach, and the SBS is also investing in deprived areas and among groups who are under-represented in business, via the Phoenix fund and community finance initiatives. The Phoenix fund has already generated a great deal of interest—250 bids were received, of which 50 were successful.

Let me tell the House about one such bid—the Phoenix development fund project for women in Birmingham. It aims to establish, develop and maintain a programme to help women across Birmingham, irrespective of their status, ethnicity or religion, to set up and run businesses. The programme will contain a blend of workshops and group business counselling activity, together with structured training. The menu of options available includes one-to-one business counselling, idea-generation workshops, workshops on relevant pieces of legislation and skills training. The project also plans to establish a self-financing working forum for women-led businesses.

About a third of start-ups today are by women. More than 840,000 women in the UK are self-employed. Despite a significant increase in women's participation in other parts of the labour market, the proportion of businesses started by women has remained roughly constant since 1998. True, nine out of 10 women think it

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is easier to start up in business today than in the past. However, discrimination is still a reality. Research by the NatWest shows that women are most likely to establish businesses in service areas. Almost 50 per cent. of businesses in that sector are started by women, and such businesses are least likely to have employees as they tend to be run from home. Women face problems starting up, including sexual discrimination, not being taken seriously, and, very important, having to juggle family responsibilities.

The SBS small firms loan guarantee scheme has been of particular help to women, who may lack a proven track record, in raising finance. Business link operators have been addressing their business plans to how best to support and encourage female entrepreneurs.

The Government recognise the increasingly important contribution of ethnic minority businesses to the economy. For many decades, such businesses have been a driving force. Starting small, ending up big—some of them massive—all of them make a tremendous contribution to British society. It is estimated that ethnic minority businesses represent about 7 per cent. of the total UK small business stock. Britain's ethnic minority businesses contribute almost £13.5 billion annually to the economy. More than half of that is here in London, where almost 50 per cent. of the UK's ethnic minority population lives.

People from ethnic minority groups are more likely to be in business on their own account and to employ others. We recognise that many ethnic minority business people are among the most entrepreneurial in our society, and we have a lot to learn from their experiences. In 1997, people from ethnic minority backgrounds represented 5 per cent. of the UK population, yet entrepreneurs from ethnic minority backgrounds were responsible for 9 per cent. of new business start-ups.

The needs of ethnic minority businesses are diverse, but they all share the common concerns of small business, including raising finance, competition and marketing. The Government want to make sure that we are tailoring our policies and business support to improve their competitiveness. That is why the new network of business links is gearing up to meet the needs for start-up support from the black and ethnic minorities. Business links can make the difference between somebody being able to start a business and just aspiring to it.

Denton Thomas was a Business Link client. When he decided to set up his own travel agency, he did not need any advice on how to do his books or pay his tax because he had been working for the Inland Revenue for 22 years, but he did need advice on accessing finance to keep him afloat through the first few months of trading. Business Link provided advice on applying for finance and helped him through the process. That was six years ago; today his turnover is approaching £1 million and he has plans for expansion. He knows that Business Link made all the difference and that without it he would not be where he is today.

We are keen to ensure that the Government think small first. A major role for the SBS, especially in relation to regulation, is to ensure that Government Departments are really thinking about the effects of their actions on small businesses. To promote this objective, the Government published "Think Small First" back in January. As a result of that publication, we have agreed to introduce a

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minimum period of 12 weeks for consultation on possible new regulations and a 12-week period of grace after regulations are finally agreed, when guidance should also be made available. This consultation period prior to the regulations coming into force will give small businesses and the regulators another opportunity to consider the implications and make the changes required.

I know that the House will join me in hoping that wherever possible we can avoid making regulations and bringing in legislation. Under all Governments, there have been criticisms that red tape stifles small business, but it is important to remember that, according to the OECD's "Economic Outlook" published in December 1999, the UK has less regulation than other OECD countries. We know, however, that there is no room for complacency and that we need to work hard to maintain and improve that position.

Of course, the sensible way is to strike a balance on regulation to protect employers, workers, and consumers and to guarantee decent minimum standards. Most businesses see the advantages of treating staff and customers well, but a tiny few do not. Last year, 180,000 people were injured and 160 killed in workplace accidents, and 30,000 consumers were harmed by faulty products. Consequently there will always be a need for regulation in some form. The Government's role is to ensure that we promote intelligent or smart regulation. In that way, we can provide businesses with effective incentives fully to meet their potential, and not wrap them up in red tape.

For employers, we have introduced exemptions for small businesses in relation to trade union recognition, EU requirements on unit pricing in shops, merger fees and rules on stakeholder pensions. While minimising administrative costs to employers, millions of employees have gained from a direct improvement in their terms and conditions, for example, through the introduction of the national minimum wage and annual leave entitlement—all with no apparent negative effect on employment levels.

Recent research shows that fewer than one in six businesses cite red tape as their most important problem. The concerns of businesses were expressed in the following proportions in a recent MORI poll: 44 per cent. on securing sales and cash flow; about 14 per cent. on costs and overheads; and about 6 per cent. on changes to regulations. That reinforces the need for accessible business support and advice for small businesses. That is why we have made that help more readily available than ever before.

In partnership with the Business Link network, the SBS recently launched a national website and contact centre—www.businesslink.org—providing information and advice. I remind the House that 1.7 million small and medium-sized enterprises are already IT-literate, and more than 450,000 of them have access to the web. The service that we now provide will continue to expand and evolve.

A major objective of the web service is to provide personalised support enabling registered users to have their interests noted so that they can be automatically provided with up-to-date information and regulatory changes and, in due course, with business opportunities—for example, from EU tendering lists.

Business Link can help with all aspects of setting up, running and growing a business. Although the new Business Link network went live in April, I should like to

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take this opportunity to thank everyone involved—Business Link, local authorities, chambers of commerce and others—for their effort and commitment in making this possible.

I believe that we are building on the good foundations laid over the past decade and that we are well on the way to having in place a truly world-class business support service. That is precisely what our small businesses deserve.

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