Scotland’s business base and entrepreneurship

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Entrepreneurship at its most basic definition is the process of designing, launching and running a new business. One of the key policy actions of business support policy in Scotland is promoting a culture of innovation and entrepreneurship that will help to grow and diversify Scotland’s business base.

Entrepreneurship has the power to fundamentally change the way we live and work. Entrepreneurs create new businesses, and this in turn can create new jobs. The businesses and products they build can create wealth and foster innovation. Thus, to understand a little more about entrepreneurship in Scotland, it is important to look at the trends and characteristics related to the nation’s business base.

Figure 1: Scotland’s business stock 2000-2018

Blog pic 1Source: Businesses in Scotland 2018, published by the Scottish Government November 2018

There were 345,915 private sector businesses (registered and unregistered and excluding central and local government) operating in Scotland in 2018 – a fall of 8,830 (-2.5%) since 2017 but still relatively high, as the third highest stock figure in the series back to 2000. Characteristics of the business base as demonstrated in Figure 1:

  • Unregistered enterprises are sole proprietorships and partnerships that are not large enough to be VAT registered and are not PAYE registered. These represent approximately one in two of every enterprise.
  • Sole traders (which can be registered and unregistered depending on VAT levels) are 69% of the business stock.
  • Medium (50-249 employees) and large (250+ employees) make up just 2% of the business base.

Performance relative to the UK

Scotland represents 6% of the UK’s total private sector business base of 5.67 million enterprises. Scotland’s business stock share lags behind Scotland’s UK population share of 8.4%.

Since 2000 the growth rate of the UK’s business base has generally surpassed that of Scotland. Between 2001 and 2004, Scotland outperformed the UK. However, this was followed by a period of under-performance relative to the UK from 2006 to 2011. The years 2012 and 2013 saw an uplift in Scotland’s performance. The last five years (2014 to 2018) have seen a changeable Scottish business growth rate, in contrast to almost constant sustained growth at a UK level. The dominant position of London in the UK economy can skew UK performance figures; thus, it is important to consider regional perspectives as shown in Figure 2. Since 2010 all English regions have surpassed the other UK nations in terms of business base growth. The Scottish business base grew by 16% over the period 2010 to 2018. The UK average for the same period was 26%.

Figure 2: Business stock growth rates, % change 2010 to 2018, UK regions

Blog pic 2Source: UK Business Population 2018, published by Department for Business, Energy & Industrial Strategy October 2018

Business births, deaths, and survival

New business registrations are referred to as “business births”, and the birth rate is calculated using the number of births as a proportion of active businesses.

Businesses that have ceased to trade – identified through de-registration of the administrative units, that is, VAT and PAYE – are referred to as business deaths. The death rate is calculated using the number of deaths as a proportion of the active businesses.

Figure 3: Business birth and death rates, Scotland and UK, 2012-2017

Blog pic 3Source: Business demography UK 2017, published by ONS November 2018

Scotland had 21,565 business births in 2017, resulting in a birth rate of 11.9% (a decrease from a rate of 12.5% of the previous year). The number of Scottish business deaths increased by 8% from 18,880 to 20,340 between 2016 and 2017, giving a death rate of 11.2%.

Disappointingly the gap between business births and deaths has been decreasing since 2014, mirroring a similar trend across the UK.  In 2013, businesses were born at a rate which was 4.1 percentage points higher than the death rate, by 2017 this gap had fallen to 0.7 percentage points.

  • Across the UK regions, the North West had the highest business birth rate at 15.9% in 2017 and the South West had the lowest birth rate at 10.6%. Scotland had the fifth lowest birth rate of the 12 UK regions – at 11.9% – below the UK average of 13.1%. Scotland increased its birth rate least of all 12 UK regions/nations, in the five years to 2017, by only 24%. And Scotland was the only region to witness a continuous downward trend in its birth rate since 2013 to the present.
  • On a positive note, Scotland’s business death rate of 11.2% was below the UK average of 12.2%. The region with the highest business death rate was London at 14.2%. Northern Ireland had the lowest death rate, at 8.2%. Scotland had the fourth lowest death rate of the 12 UK regions.

Figure 4: Business birth and death rates, UK regions, 2017

blog pic 4Source: Business demography UK 2017, published by ONS November 2018

Scotland’s business survival rates were above the UK average across all categories in the 1-year to 5-year survival rates. The Scotland 5-year survival rate for businesses born in 2012 and still active in 2017 was 43.7% – this was above the UK average of 43.2%. Scotland was ranked first out of the UK’s 12 regions for 2-year and 3-year survival rates. Since 2012, the region with the highest five-year survival rate has been the South West at 45.8%. The region with the lowest five-year survival rate was London at 39.3%.

Promoting entrepreneurship – is Scotland doing enough?

The statistics reveal a mixed performance in terms of business base characteristics. Scotland has relatively higher business survival rates and lower business death rates, in comparison to UK averages. However, some of the statistics indicate a relatively poor performance in terms of growing the business base and the business birth rate. This poses questions about the nature of entrepreneurial policy support. Is Scottish policy doing enough to create a culture and environment of entrepreneurship? Drivers of entrepreneurship can include: culture, government policy, access to funding and finance, access to advice and support systems, and education and training.

Amongst these government policy plays an important role in creating conditions in which businesses thrive. Policy needs to be wide reaching, from embedding entrepreneurship in schools, to enhancing understanding of what drives entrepreneurship, from generating a more informed debate about the role of entrepreneurs in the stimulation of economic growth and job creation, to the direct support offered to start-ups at local and regional levels.

Alison O’Connor, Financial Scrutiny Unit, SPICe