Which high growth SME’s are driving job creation in your local area?
Generating new jobs is a key issue for many regional economies. One relevant area to this challenge that has received relatively little attention in regional Australia is the role of high growth Small and Medium Enterprises (SMEs).
Jack Archer from the Regional Australia Institute explains the opportunity practitioners have to better support this part of our business communities as well as the methods the RAI is testing to make new impact in this area.
What are high growth SMEs?
The vast majority of companies only experience modest growth. The number of businesses that decrease in size is also similar to the number that increase their size.
High growth SMEs are the companies that sit outside this trend. They achieve at least 20% annual growth for three years or more. Estimates on how many high growth SMEs you can expect in any business community vary around the world, ranging between 3-10% of all SMEs[i].
In understanding high growth SMEs you also need to look past the fads. While everyone is very interested in tech start-ups right now, research shows that high growth SMEs occur in all sectors of the economy. In fact, ground breaking UK research by NESTA found them to be equally present in ‘high-tech’ and ‘low-tech’ sectors of the UK economy[ii].
High growth SMEs are typically driven by entrepreneurs with serious growth ambitions and strong business leadership capability. They are most often young businesses who have moved through the initial start-up phase and found their growth pathway. They are very different and have different needs to most SMEs whose growth is lower and ambition less marked and so require a specialized approach to support.
So why should we care about this small group of companies when there are so many other issues to consume our time?
The simple answer is because of their outsize contribution to jobs and innovation in the economy.
The most striking result of research on these businesses is their contribution to job creation. The average high-growth company in the UK tripled its employment over a three-year period, starting with around 60 employees in 2005 to reach over 170 in 2008. Recently released work in Australia shows that over the period 2006–2011, the largest contribution to job creation in Australia (40 per cent) came from young SMEs: firms aged 0–5 years that had 1–199 employees and accounted for only 15 per cent of total employment. The contribution of young SMEs to gross job creation in Australia was 50 per cent compared to the OECD average of 41 per cent.
High-growth firms are also likely to contribute disproportionately to innovative activity in the economy. We know that SMEs contributed to 54 per cent of all “significant technological innovations” in Australia[iii] and it is the faster growing firms that are more likely to continue to innovate successfully in a way that drives local economic benefits.
This is a core reason why regional economic growth is highly correlated with the presence of many small, entrepreneurial employers – not a few big ones.
How do we best support high growth SMEs in local and regional economies?
This is all great news but the challenge we face as practitioners is a gap in support at the local and regional levels for these businesses. While, National and State industry policy is focused on high growth SMEs in a few priority sectors, only a few businesses in an area will fit the mould. Because these businesses occur across the economy, many high growth and high growth potential businesses will not be able to access support from these programs limiting overall local and regional impacts.
We also know that in regions, the business ecosystems and management skills that enable high growth SME are often weaker than in metropolitan areas. This makes it more difficult for high growth potential SMEs to contribute effectively to new jobs in many areas, particularly outside the CBDs and major metropolitan areas.
The good news is that local and regional economic development practitioners can do something to change this.
The first area of focus for practitioners should be on the health of the local or regional business ecosystem. Although there are different approaches and ecosystem models, successful ecosystems are seen to generally require the following conditions[iv]:
- A pro-entrepreneurship culture
- Guidance from experienced entrepreneurs
- A supportive regulatory environment
- A collaborative business culture
- Visible successes and role models
- Risk tolerance
- Availability of capital
- Technical skills
Local and regional economic development practitioners can seek to influence many aspects of this ecosystem.
Pro-entrepreneurship culture, collaboration and visible successes and role models are something that can be facilitated through events, communication and support for business networks and other local initiatives. Finding people and groups in the community who exemplify these features and nurturing their efforts through funding, publicity and public support can help to drive a positive environment for high growth businesses.
A supportive regulatory environment is also an aspect where local practitioners can have an impact. Identifying how local SMEs seeking to expand their business are treated by local government is one important question. Are they confident to approach council with their ideas and options? Will they get good access and information to help them build growth plans that are likely to meet regulatory requirements? This can be crucial in retaining and attracting high growth businesses in an area and may warrant dedicated services.
Finally, and probably most importantly, is to seek to identify and provide targeted support to high growth businesses. Guidance and mentoring from people with experience is an important factor in business success particularly if there are weaker networks and culture in your area. In fact, Professor Roy Green suggested in a report several years ago that:
High growth SME CEOs need to develop strong growth plans and are constantly pushing beyond the boundaries of their experience. Supporting structured mentoring programs can be an effective way of targeting support to high growth SMEs to improve their success rate[v].
Confirming whether this support is available at a level of quality needed for high growth firms is an important part of any strategy to enable this part of the economy.
The most crucial aspect to any initiatives in this area is that they target the highest potential businesses. 9 out of 10 businesses won’t be high growth SMEs so it is essential to rigorously target your actions to the businesses that can make a difference.
Our assessment is that we have a lot of work to do to better identify and support high growth SMEs. The Regional Australia Institute has begun piloting a high growth SME support method in regions – we call it the Regional Accelerator.
This approach reviews a business ecosystem using available data and engagement with key players to identify the gaps that need to be filled by good economic development strategy. Regional Accelerator then provides growth mentoring to the area’s highest potential SMEs on a competitive basis to help stimulate accelerated job creation and the visible success stories that will inspire others.
This is a new way of doing things in regions and we are now in the midst of our first pilot in the Southern Inland region with a second coming very soon. The RAI will evaluate the results and share the lessons from this work so that others can use the insights and the model in their practice.
We are still building our knowledge in this area and it will take experiments in different areas to get the approach right. If you have experience at the local or regional level in targeting high growth SMEs or think your area could be a great spot for a pilot we would love to hear from you.
Regardless of where you are in Australia, identifying and supporting high growth SMEs should be an important part of every practitioner’s economic development toolkit.
Jack Archer is CEO of the Regional Australia Institute. Information on the Southern Inland Regional Accelerator can be accessed atwww.sira.net.au or by contacting David Spear on 02 6260 3733. For further information about the Regional Australia Institute and to keep the conversation going, go to www.regionalaustralia.org.au/get-involved/
References and further reading
[i] Dept of Industry Report on Employment Dynamics of Australian Entrepreneurship http://www.industry.gov.au/Office-of-the-Chief-Economist/Research-Papers/Pages/The-employment-dynamics-of-Australian-entrepreneurship.aspx
[ii] Nesta, the vital 6% research summary http://www.nesta.org.uk/publications/vital-6
[iii] Peacock, R. (2004). Understanding small business: practice, theory and research (2nd ed.). Scarman Publishing, Adelaide: Australia.
[iv] StartupAUS Crossroads 2015 http://startupaus.org/wp-content/uploads/2015/04/Crossroads-2015.pdf
[v] Green R, Management Matters http://www.industry.gov.au/industry/OtherReportsandStudies/Documents/ManagementMattersinAustraliaReport.pdf