Thursday, September 15, 2005

Business Support - Unplugged

Stripped down, this is fundamentally what I think public funded business support should be about:

1. Driving up economic impact and business peformance

2. Economic impact maximised by giving businesses:

A ‘hand-up’ – to allow them to either start a business, or correct their existing business performance from failing to stability or growth, perhaps assisting someone whose business would fail. High impact is achieved from ‘correcting’ downward trajectory

A ‘push-up’ – to assist them to enter a significant growth trajectory that they wouldn't have necessarily embarked upon. High impact is achieved from increasing likelihood and scale of growth

Fundamentally its all about driving business peformance upwards really, and trying to lessen the risks of failure or flatline performance.

I think an approach should also work with the market better. But I'll get back to you on that later.



At 8:45 am, Anonymous Michael said...

Still built on an assumption that you have to do something.

I've been interested in playing with what is the opportunity cost of business support which goes something like this...

If the goal of business support is to boost economic performance the judgement isn't about which is the better programme to fund, relative to the number of proposals on the table, but which is the most effective programme relative to leaving the money with businesses in the first place, i.e. by not taxing them or to follow the crowd by having some form of tax credit.

In essence your typical CEO of a Business Link or director of Enterprise of an RDA is using a budget ultimately derived from taxes and in making statements about delivering economic growth we are making an assumption that they can allocate that money collected through taxes in order to achieve a greater rate of economic return than leaving it with businesses in the first place. Certainly some will be taken as profit and spent on nice holidays etc, but some will also be reinvested in the business.

Which means the test is that can an RDA or any business support organisation make economic decisions to stimulate improved business performance which outperforms the pluralist behaviour of lots of entrepreneurs making individual decisions to support their private goals?

I'm rambling, but hopefully you get the jist. The positive strategy of doing nothing is too rarely considered.

At 3:50 pm, Blogger Angry Economist said...

Brilliant. You're absolutely right.

Some of this comes back to economic impact - that the net economic impacts are much bigger than the counterfactual of doing nothing and leaving the taxes unspent, back with the businesses.

Most RDAs are supposed to consider this - looking at market failure, displacement, attribution, additionality etc. But many don't.

At 10:03 pm, Anonymous Michael said...

Most RDAs are supposed to...

I'd be delighted if you could point me to a RDA/DTI evaluation study that said this is the return that we got in investing x in y programme, measured more than with just happy sheets and/or allowing for what the business would have done anyway v. doing nothing and leaving the taxes with businesses.

If I owned one I'd eat my hat if you linked the said study

At 6:11 pm, Blogger Angry Economist said...

Hmm I can't. So I won't be sending you a hat to eat!

However - as a consultant in Scotland, I did evaluate quite a few enterprise support programmes which were quite effective actually. This was done in a formal evaluation, conducted by us consultants in a robust way. This didn't happen every day but I did find quite a few successful programmes which achieved high levels of additionality and high net economic impact.

At 8:19 pm, Anonymous Michael said...

That's a relief,

In re-reading this thread you started with the proposition that fundamentally publicly funded business support should be about:

1. Driving up economic impact and business peformance

2. Economic impact maximised by giving businesses: a hand up or a push up

Assuming a reasonable moral framework in which markets work, I would argue the how of your goal should only be to support those 'interventions' which enable improvements in the effectiveness of market operations - I guess what you refer to as a hand up - actions which help out imperfections in information or reduce transaction costs, like good public transport between Regions.

The 'push up' interventions I read as those where public actions are seeking to out think the market. Often referred to a picking winners. This is the type of intervention i struggle with struggle with, particularly at the micro business adviser level.

Firstly as we've discussed in terms of ability to allocate resources more effectively than entrepreneur, secondly the assumed confidence of such public bodies to actually believe that they can out pace markets. If they could they wouldn't need public money to operate, as they'd be making so much money from forecasting!

So and connecting into an earlier thread, publicly funded business support should only be for those things that improve the effectiveness of markets and if the evaluation criteria is against the opportunity cost of doing nothing. My guess is that if implemented against a lot of current programmes they'd be a lot of unspent budgets.

At 11:09 am, Anonymous David said...

Like Michael, I'd like to see any work that's been done on this. It would also be useful to see a comparison between publicly-funded support and what the market offers.

In theory though, such studies shouldn't exist, because publicly-funded support should be directed towards gaps the private market has left. So it would be comparing apples and pears.

Of course, it's arguable that those gaps are there because the market has decided those areas won't provide it with a decent ROI.

But that would suggest the private market is perfectly efficient. This can't be so: VC funders, for example, admit they fund about 9 dogs for every star business. What's more they don't touch businesses which need, say, only £1,000 to start. Even though those businesses are able to return 100%, 200% or 1,000% on the initial investment.

Perhaps then, the choice would be to follow Michael's theory that "publicly funded business support should only be for those things that improve the effectiveness of markets", and direct publicly-funded support towards getting rid of the inefficiencies such as exist in VC funding.

At 9:28 pm, Blogger Angry Economist said...

All interesting stuff. This was really the bared down, unplugged version of business support for the largely uninitiated (i.e. board members).

I actually have some of this approach mapped out more formally which I will share once its been through the scrutiny of colleagues.

You can give SMEs a push up who have growth aspirations but who need help to set them on a growth trajectory. Market failure would definitely have to come in too. E.g. they don't have the ability to be ready for VC investment - some help getting them investment ready might work.

All in all picking winners is daft. Winners pick themselves is what seems to be the case. And if there are particular sticking points that the public sector is justified in correcting in some way, then it might be (might!) be legitimate.

I am actually working on a more hard boiled case for these kinds of interventions too. Using some survey data to unpick the main barriers to growth and then seeing if there is any role for the public sector, or not as the case may be.

Nonetheless the 'unplugged' version was not for the purists but for the folk who don't really get market failure, economic impact, non-displacement etc!

Cheers for comments.

Will post some stuff on a more formal framework for assessing the case and priority for business support, various clients, on the basis of things like market failure etc. I am also developing an policy for business support that 'works with the market' more - so public interventions are more about making market mechanisms work better on a sustainable basis, rather than handing out subsidies and grants.


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