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Trend in UK high-growth firms

The most recent survey evidence suggests that the profile of growth achieved by the UK’s SME population has remained broadly stable since 2015. In 2017 According to the European Research Council (ERC) 36 per cent of SME employers reported turnover growth in the Longitudinal Small Business Survey (LSBS), with 19 per cent of firms reporting a fall1. These proportions were broadly similar to those in 2015 and 2016. Expectations of growth also remain broadly stable, with 47 per cent of LSBS respondents expecting turnover to increase during 2018. Evidence from the same survey also provides some welcome news about SME exporting with the proportion of exporting firms rising 2pp between 2016 and 2017.

Looking at data from the longitudinal Business Structure Database (itself based on VAT and PAYE data) can provide a long-term picture of the proportion of high-growth firms (HGFs) in the UK. A high-growth firm is here defined using the standard OECD definition: more than 10 employees, three years old and has achieved average growth of either sales or employment of 20 per cent pa for the last three years. In 2017 there were around 11,000 such firms in the UK, accounting for around 6 per cent of the eligible population of SMEs. SMEs’ willingness to invest has also softened. In 2017, the LSBS suggests that 49 per cent of SME employers had arranged or funded training in the previous year. This was a fall of 6 percentage points on 2016 and the lowest level since 2010.

There is also consistent evidence of some retrenchment in terms of other intangible investment and innovation activity among SMEs. The LSBS has identified a fall in levels of product and service innovation activity among SMEs since 2015. This pattern is supported by data from the UK Innovation Survey 2017, published in May this year, which suggested that the proportion of ‘innovation active’ SMEs fell from 53 per cent in 2012-14 to 49 percent in 2014-16. Over the same period the proportions of firms investing in aspects of their innovation activity also fell: computer software (27% to 19%), computer hardware (24% to 13%), new marketing methods (12% to 4%) and launch advertising (8% to 3%).

Trends in start-up, growth and retrenchment all play an important role in shaping job creation in both gross and net terms and together form a measure of business dynamism in the economy. The number of start-ups in an economy is often seen as the headline metric of ‘enterprise’ and ‘entrepreneurial ability’. Start-ups have been rising steadily in the UK in recent years but seems to have stagnated in 2017. Many start-ups fail within a few years, so start-ups contribute to both job creation and job destruction. A small subset of start-ups, however, grow quickly, and contribute disproportionally to net job growth and to improvements in industry productivity.

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