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measuring Scotland's progress towards A SMART, SUCCESSFUL SCOTLAND
entrepreneurial dynamism and creativity
LEAD INDICATOR
2A - HIGH GROWTH FIRMS (BUSINESS STARTS)
Why this measure?
It is important that new firms started in Scotland, a measure of Scotland's entrepreneurial dynamism, are both capable of, and succeed in achieving, high growth. High growth firms are, in general, more innovative in product development and in the marketplace. This innovation creates jobs and opportunities for further growth. It may also have significant spillover effects for other businesses within Scotland.
How does Scotland perform?
Proportion of new and nascent entrepreneurs stating they would employ 20 or more people in five years (2002)
Limited data were available for international comparison from the Global Entrepreneurship Monitor (GEM). Of those data that were available there was little variation in the percentage of new or nascent entrepreneurs expecting to employ more than 20 people in five years - the proxy measure used for this indicator. The lack of cross-country variation can be seen from the graph, but it should be remembered that only a limited sample was available. However, Scotland does less well than the UK. Given this small sample size it is difficult to determine a quartile ranking for Scotland, but it can reasonably be assumed that Scotland would not be in either the first or fourth quartiles and most likely lies in the third quartile given Scotland's score on the Total Entrepreneurial Activity scale (Indicator 2b). Data specific to Scotland showed that between 1998 and 2001 for those enterprises first registered for VAT and/or PAYE in 1998 0.8% could be considered high-growth firms - with a high-growth firm defined as one that increases from between 0-4 employees to over 15 employees over the same period.
What does this mean for Scotland?
It is difficult to draw any firm conclusions given the limited data available, but there does appear to be limited variation in entrepreneurial intent, at least as regards high-growth firms in countries of a similar size to Scotland. There is a significant gap between how many firms are expected to be high growth and how many turn out to be high growth. This should not be unexpected, as there is often some degree of divergence between what individuals expect to do and what they in fact do. It should also be remembered that the data on high growth firms for Scotland are for firms started in 1998 while the data for the GEM are based on responses in 2002. These responses will involve expectations of future market conditions and these expectations will likely vary from those of 1998. But, that said, it is clear that one of the challenges facing the Scottish economy is to raise the proportion of new starts that go on to achieve high growth.
2B - NEW BUSINESS STARTS PER 10,000 OF THE ADULT POPULATION
Why this measure?
The number of businesses started over a period gives a real measure of the more difficult to measure concept of entrepreneurial spirit, and ultimately reflects how well that spirit is transferred into tangible outputs - new firms that represent the realisation of commercial opportunities and the creation of jobs. High rates of new firm formation are found in dynamic economies and are increasingly associated with high rates of economic growth.
How does Scotland perform?
New business starts per 10,000 of the adult population (1994-2001)
The measure used to calculate business starts is the number of VAT registrations. A positive sign is that the number of registrations per 10,000 of Scotland's adult population in 2001 was the highest since 1998. Using VAT registrations does not capture all business starts as some, especially small businesses, may not be VAT registered, though there is no reason to suspect this would disproportionately affect Scotland.
The latest figures for 2001 show that the number of business starts in Scotland is less than half that of the leader London. In fact London has a considerably higher number than the next best performing region, the South East, with Scotland 9th of the 12 regions.
Of those companies started in 2000, 91.1% survived one year in Scotland with the figure being very similar for the UK (91.4%). Of those firms started in 1998, 62.6% survived three years in Scotland while 64% survived in the UK. The survival rates are only marginally different but place Scotland 7th and 12th respectively amongst the regions of the UK for one- and three-year survival rates.
Total Entrepreneurial Activity2(TEA) index by country (2002)
To allow an international comparison, data from the 2002 Global Entrepreneurship Monitor 3 are used. Though this does not measure the number of business starts the Total Entrepreneurial Activity (TEA) index does act as a proxy. The caveat must be introduced that there are margins of error around these figures due to the small sample sizes. Of a 25- country OECD sample Scotland is 16th equal, putting it in the third quartile alongside the UK and Germany. New Zealand leads the first quartile.
What does this mean for Scotland?
The TEA rate shows that Scotland is some way behind the lead countries, even when the margin of error within the statistics is accounted for. It is similar, though below that of the UK - and this is reflected in the number of new business starts. The rate of business starts in Scotland has lagged behind the UK for some time, and although there is evidence that the absolute number of business starts in Scotland is increasing there is no clear indication that the position is improving markedly relative to the UK. It should be noted, however, that of those firms started there is little difference in survival rates as between Scotland and the UK.
2C - PROPORTION OF INNOVATIVE FIRMS
Why this measure?
Innovation is strongly correlated with economic growth and is essential for Scotland's businesses if they are to be at the forefront of technological advancement and productivity enhancement. Innovation can take many forms and needn't refer only to products: it can refer to production processes, partnerships or the transfer of ideas from one firm or industry to another.
How does Scotland perform?
Proportion of innovative firms (1998-2000)
The latest Community Innovation Survey (CIS) is not yet available for an international comparison. The CIS survey takes a broad definition of innovation 4 and admits that the small sample size does lead to a significant margin of error around the survey findings, but even still the issue of note is the lack of any significant variation in innovation across regions of the UK.
What does this mean for Scotland?
Scotland's second-bottom position in terms of innovation is of less concern given the caveat that there is a significant margin of error around the statistics. Perhaps the issue of more importance is that the absolute level of innovative firms across the UK is, on average, less than 50%. In the previous CIS, covering the period 1994-96, the UK as a whole had a higher percentage of innovative companies than the EU average.
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