Select Committee on European Union Written Evidence

Memorandum from the Institute of Directors (IoD)


  Thank you for asking the Institute of Directors (IoD) to provide evidence to the House of Lords Select Committee on the European Union (EU) on the above subject. The IoD is a non-party political organisation with some 55,000 members in the UK, whose aim is to help directors to fulfil their leadership responsibilities in creating wealth for the benefit of business and society as a whole. As a general rule, the IoD does not carry out extensive research on a sectoral basis, such as for-profit technology businesses. Instead, IoD research generally focuses on problems and issues that are common to all businesses, irrespective of their background. As a consequence, our comments on the two broad areas of public support for entrepreneurship identified by the Committee for investigation—access to finance and financial incentives and policies to support management and work force skills—may unfortunately seem somewhat impressionistic.

What are the current programmes or schemes in the UK (EU)?

  1.  Until recently the UK Government ran a plethora of schemes to assist businesses of all kinds. The Department of Trade and Industry (DTI) alone ran 183 different programmes, 59 of which provided grants direct to business. [1]However, the DTI is currently in the process of reorganising the system of business support that it runs and so we do not know precisely how many schemes that it now has in operation. The most well known programmes run under the auspices of the DTI to provide access to finance for businesses, including for-profit technology based businesses, include the Small Firms Loan Guarantee Scheme, the UK High Technology Fund, Regional Venture Capital Funds, the SMART scheme and enterprise grants. Financial incentives to promote investment by for-profit technology based businesses include the Treasury's Research and Development (R&D) tax credit. At the EU level schemes include the European Investment Fund (EIF), the European Investment Bank's European Technology Facility (ETF), the Commission funded EFT Start-up facility and the Commission's I-TEC scheme. [2]

  2.  The UK Government also operates a variety of schemes to support management and workforce skills. For example, the Learning and Skills Council (LSC) provides 85 per cent of the funds to Further Education colleges, finances schemes such as Work Based Learning for young people and supports employer-based programmes such as Investors-in-People. [3]Similarly, the Department for Education and Skills runs the Small Firms Training Loan scheme, which provides financial support for the cost of training and which is administered by the banks. [4]Many of these funding activities are not specifically geared towards the needs of for-profit technology based businesses but in principle they are able to benefit from them. With respect to policies supporting management, the Small Business Service (SBS) has assisted the Council for Excellence in Management and Leadership to pilot the Business Improvement Tool for Entrepreneurs (BITE). BITE apparently helps entrepreneurs to identify development needs and suggests solutions to some of the problems that entrepreneurs may encounter. [5]The UK Government also produced a report last year on some of the steps that it is taking to support the development of management skills in the country. [6]

Are the objectives of these programmes well specified?

  3.  The sheer plethora of schemes that exist to help businesses almost certainly means that some of them have similar objectives. For example, the LINK programme and Faraday Partnerships run by the DTI both help to promote the development and exploitation of new technologies between research institutions and enterprises. [7]However, the IoD is not in a position to give a clear assessment of whether the objectives for the many different programmes run by the UK Government or by the EU are well specified.

Do the programmes clearly identify the annual costs and benefits in each case? What are they?

  4.  The cost of the various programmes in the UK to help businesses gain access to finance or to help them support management and workforce skills can typically be found in the various annual reports that are produced by their respective Government departments. The annual reports usually state how many businesses have taken advantage of the schemes that are in operation, or how many grants have been awarded under a particular programme.

  5.  As a general point of interest, a survey of 504 IoD members in 2002 showed that 17 per cent (86) had approached the DTI for financial support. Of these, 65 per cent (56) were successful in their request for financial assistance. Of those members who received financial help from the DTI, 65 per cent (36) believed that the assistance made a significant difference to their business's prospects. [8]However, it is impossible to know whether the 36 members who received financial assistance from the DTI and who believed that this help made a significant difference to their business's prospects had exhausted all alternative sources of finance.

  6.  Ultimately, UK Government departments should only operate schemes that assist for-profit technology businesses in gaining access to finance if there is a case of market failure. Clearly it would be irrational for UK Government departments to finance activities and projects that the private sector would be prepared to undertake in the absence of Government support. The same argument applies to policies designed to support management and work force skills. Similarly, the EU should only finance schemes of the kind discussed here in case of market failure.

Which, in your view, are the most effective programmes currently? Why is this?

  7.  The IoD has not conducted any formal assessment of the various schemes run by the UK Government or by the EU to assist for-profit technology businesses. However, there are a number of general programmes that are important in their own right and which probably benefit for-profit technology businesses. Firstly, UK Government support for the science and engineering infrastructure (for example, money spent on the Patent Office, the Design Council and the various research councils like the Economic and Social Research Council) is in the interests of for-profit technology businesses. Similarly, finance for what might be called curiosity or "blue-sky" R&D could be advantageous for these businesses. Discoveries and developments from "blue-sky" research might produce spill over effects which for-profit technology businesses can benefit from.

  8.  Secondly, UK Government measures to increase the awareness amongst for-profit technology businesses about the developments that take place as a result of R&D in science and engineering at home and abroad and to help them take advantage of new discoveries is probably useful. The DTI operates a number of programmes to achieve these objectives, including International Technology Promoters and Faraday Partnerships. Indeed, the general provision of advice and information to businesses about new techniques, best practice and product information is useful because research suggests that small firms that access and use business support services are more likely to be profitable and survive than those firms that do not. [9]

  9.  Thirdly, there are some schemes that provide financial assistance to businesses that are likely to be reasonably helpful. For example, the Small Firms Loan Guarantee Scheme, which provides a guarantee to encourage banks to lend to businesses that are unable to borrow because they lack collateral or a track record, has the potential to assist young for-profit technology businesses. [10]

What improvements to existing programmes, or what new programmes of support, do you consider desirable and why?

  10.  The system of business support is complicated. In addition to the SBS and the 45 Business Links that constitute the Business Link network, there is the Learning and Skills Council for England and its 47 subsidiary local Learning and Skills Councils. There are also eight Regional Development Agencies, plus the London Development Agency and the Government Offices for the Regions. This plethora of institutions does not make for a clear system of business support. Many firms, including for-profit technology businesses, are probably unsure of which publicly funded institution they should approach for advice and support. Accordingly, the existing system of business support should be rationalised.

  11.  Moreover, there should be a reduction in the number of business support schemes that are in operation (as mentioned earlier, the DTI has made a move in this direction). The aim of policy at both the national and EU level should be to rationalise the system of programmes to help businesses partly to simplify the arrangements for firms and partly to ensure that the surviving schemes can make more of an impact.

Are policies across and within each of the above areas (ie access to finance and the financial incentives and policies to support management and work force skills) effectively co-ordinated by the Government/the European Commission?

  12.  As indicated previously, both the UK Government and the EU operate a number of schemes to improve access to finance for small businesses and this would seem to indicate that there is scope for better co-ordination in the future.

How appropriate is the existing balance of support, between each of the broad areas referred to above (ie access to finance and the financial incentives and policies to support management and work force skills)?

  13.  In broad terms, access to finance for businesses in general in the UK is probably not a problem at the present time. Moreover, the best way to improve accessibility of finance for businesses as a whole is to keep the tax burden and interest rates relatively low. This is because most businesses use their own resources to finance their operations or do so by borrowing from the banks at variable rates of interest. Government and EU schemes to improve access to finance can only ever have a marginal impact.

  14.  There is a serious need to improve basic standards in education in the UK. A fifth of the adult population is functionally illiterate and innumerate. [11]All firms, including for-profit technology businesses, would benefit from having a better educated workforce.

24 April 2003

1   House of Commons Hansard, Written Answers for 17 December 2001 (London: The Stationery Office, December 2001), column 101. Back

2   Useful information on many of these schemes can be found in Finance for Small Firms-A Seventh Report Bank of England, January 2000). Back

3   In Demand: Adult Skills in the twenty first Century (Performance and Innovation Unit report, December 2001), pp 47-48. Back

4   Ibid, p 43. Back

5   Trade and Industry-The Governments Expenditure Plans 2002-03 to 2003-04 (Department of Trade and Industry, June 2002, Cm 5416), p 92. Back

6   Managers and Leaders: Raising our Game. Government response to the Report of the Council for Excellence in Management and Leadership (Department for Education and Skills and Department of Trade and Industry, 2002). Back

7   For information on the LINK programme and Faraday Partnerships, see Trade and Industry-The Government's Expenditure Plans 2002-03 to 2003-04, pp 73-75. It is difficult to tell from the written answer provided by the Secretary of State for Trade and Industry what the difference is between the Faraday Partnerships and the LINK projects. See House of Commons Hansard, Written Answers for 6 February 2002 (London: The Stationery Office, February 2002), cols 969-70. Back

8   Richard Wilson, The Department of Trade and Industry: past problems, current difficulties and future objectives (Institute of Directors, 2002), pp 44-46. Back

9   "New research shows that advice helps businesses succeed", Department of Trade and Industry press release, 12 October 2001. Back

10   An assessment of the scheme was made four years ago by KPMG. See An Evaluation of the Small Firm Loan Guarantee Scheme (Department of Trade and Industry, 1999). Back

11   Improving Literacy and Numeracy-A Fresh Start (Report of the Working Group chaired by Sir Claus Moser, Department for Education and Employment, 1999 Ref: CMBSI). See also, Second Report of the National Skills Task Force. Delivering Skills for all (Department for Education and Employment, 1999), especially p 23. Back

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