Scottish Enterprise high growth firm presentation by the ERC. September 24th 2020

1. Mark Hart1, Neha Prashar1 and Karen Bonner2
(1Enterprise Research Centre, Aston Business school and 2Ulster
University Economic Policy Centre)
Presentation to Scottish Enterprise, 24th September 2020

2. Background
• Presentation based on a report to Scottish Enterprise (SE) in January 2020 –
“Analysis and Benchmarking of Business High-Growth Performance in Scotland”
• SE commissioned analysis to explore the high-growth dynamics of Scotland’s
business base, benchmarking this against other regions of the UK.
• The objective was to focus on the level to which Scottish businesses achieve and
then sustain levels of high-growth, ultimately reaching the definition of becoming
a High-Growth Firm (HGF) as defined by the OECD, and how this compares with
elsewhere.
• The analysis also presents a critique of the definition of a HGF and sets out some
alternatives definitions and methodologies to allow policymakers to more
accurately focus on business growth over time.
• Data – ONS Business Structure Database (BSD)

3. Business Dynamism – the Challenge
• Initial survival and scaling of start-ups a key concern – not
interested in the volume of start-ups per se
• Very few firms that can be categorised as ‘high-growth’ or
have shown evidence of scaling
• Growth ambition among early-stage entrepreneurs and
micro-businesses is low
• These ‘weak’ business growth metrics show some correlation
with low levels of productivity

4. HGF Incidence Rate (%) in the UK Regions
and Nations (2015-18)
(OECD employment definition: average 20%+ employment growth per year over 3 year period and
10+ employees in base year)

5. HGFs incidence rate (%) in Scottish
sub-regions, 2015-18
(OECD employment definition: average 20%+ employment growth per
year over 3 year period and 10+ employees in base year)

6. HGFs incidence rate (%) in Scotland
UK – Scotland Gap 2010-
2018
Sector 2010 - 2018

7. Small HGFs Incidence Rate (%), 2015-18
(OECD employment definition: average 20%+ employment growth per year over 3 year period and
10+ employees in base year + adding at least 8 employees if a micro-business – i.e., 1-9 employees)

8. HGFs in Scotland – Summary
• Scotland has a ‘high-growth deficit’ according to the descriptive analysis presented
in this report based on the OECD definition of a high-growth firm.
• We can crudely estimate this ‘deficit’ in Scotland by calculating the number of
HGFs there would have been in 2015-18 if the UK incidence rate of 6.2% is applied.
There would have been an additional 128 HGFs (20% employment definition) in
Scotland (or 81 if London excluded from the analysis).
• We need to mindful of course that this simplistic ‘closing the gap’ type of analysis
ignores the obvious fact that having more of these firms may well have negative
effects on the performance of other established firms, including HGFs – a potential
zero-sum game.
• Further, irrespective of the HGF metric used in this analysis it is clear that Scotland
under-performs when compared to other parts of the UK in terms of the
proportion of its business base that can be categorised as a high-growth.

9. Jobs or Productivity?
Turnover Growth
Job
Growth
Zero
Zero
‘Green Zone’
+
+
+
-
-
-
Only one ‘space’ where
growth in T/O; Jobs
and productivity are all
+ve – the ‘green zone’
But sparsely populated
with firms – 9%
…and more than half of
them where there is
very little growth
Rule of thumb – 74% of
firms which grow
turnover grow
productivity; 21% of
firms which grow jobs
grow productivity
Source: Anyadike-Danes, M and Hart, M (2016) “Seeing the trees for the wood: going with the
grain of the extraordinary heterogeneity of firm-level productivity”, ERC WP, November 2016;
Anyadike-Danes, M (2016) “Locating High Growth Firms in Productivity Growth Space” – Slide
deck available from author. British Business Bank (2018)
11%
6%
6%
27%
7%
9%

10. High-Growth Firms: Jobs Vs Productivity?
• Only 20% of 10+ employee firms in the ‘green zone’ are HGFs (T/O
definition)
• Only 5% of 10+ employee firms in the ‘green zone’ are HGFs (Jobs
definition)
• So from a productivity perspective HGFs, as defined by the OECD,
are not an important group of firms!!
• But,………… should we be focusing on these firms anyway? – more
useful is a life cycle approach and focus on drivers of high-growth
episodes!!

11. High-Growth Episodes – a cohort
perspective
• The OECD HGF definitions and its variants are less than optimum and we
urge SE not to base a scale-up strategy upon this sub-optimal metric.
• A HGE is defined as firms with 10+ employees experiencing at least 20% or
10% growth in employment the following year. We compute the annual
growth rate for each year (2010-11 to 2017-18) and place each year into
three categories:
– ‘High-growth’: ten or more employees and growth of 20% or 10% in that year.
– Alive but not high-growth: firms that don’t meet the ‘high-growth’ threshold, which are
growing more slowly, not growing at all or declining in that year and also firms that did
grow by 20% or 10% but have fewer than 10 employees.
– Not active or no employment: when a firm has no employment or disappears from the
database. This could be for a number of reasons that don’t necessarily relate to the
death or closure of a firm, such as, the firm could have been acquired and still be
operating under another legal entity.

12. High-Growth Episodes - Scotland
• Analysis of a cohort
of start-ups in 2010
placed the concept
of ‘high-growth’
within the life cycle
of the business -
‘high-growth’ can
occur at any stage.
• Weakness of the
arbitrary OECD
definition by
rendering invisible
many firms as ‘high-
growth’ because
their rapid growth
was not consistent
year on year and
took place in
discrete one or two-
year episodes over
the decade.
Scottish Start-ups in 2010: timing of ‘high-growth’
events (20% emp. def) 2010-18

13. Modelling High-Growth Episodes in
Scotland 2010-18
• Compelling evidence from the descriptive analysis of Scotland
having a lower proportion of HGFs as defined by the OECDs.
• But, our econometric analysis indicates that when we control
for the nature of the business population (size, age, sector,
prior growth), together with environmental variables such as
education, ethnicity and other macro variables such as growth
and new venture formation.
• …….. then the case for a ‘high-growth deficit’ in Scotland is
severely weakened.

14. Operationalising a ‘Scaling’ Strategy
• In practice though, identifying a firm about to have its first
HGE may involve quite different lead indicators or triggers
than the indicators which might be relevant for firms having a
second or third HGE.
• We might hypothesise that:
– the first episodes of high-growth might be related to strategic
decisions to innovate and/or engage in international activity for the
first time.
– Repeat episodes may stimulated by different factors such as the
decision to look for additional debt or equity finance to consolidate
and kick-on after an initial burst of high-growth. This will require
further research to test such hypotheses.

15. A tale of two ‘high-growth’ metrics
• SE needs to adopt a more nuanced view about business growth and high-
growth in particular.
• Reliance upon a single definition (i.e., the OCED HGF) is less than optimal
and as we have shown renders invisible much of the growth and indeed
high-growth we observe in businesses across the Scottish economy.
• OECD HGF definition? – arbitrary and leads to misdirection of policy - it is
well past its sell-by date
• High-growth episodes? – reflecting the reality of growth for those firms
that do grow.
• Research into the triggers of these episodes and to examine the role of the
various interventions associated with the Account Managed system in
Scotland would be an invaluable next steps project.

16. Policy Imperative
• Step away from growth rates as the central concern towards
‘growth trajectories’ - our shorthand term for the dynamics of
job creation over a firm’s life.
• This better captures the interplay between growth and
survival.
• It provides a different approach to measuring the contribution
of rapidly growing firms to job creation and economic growth.

17. A final word about ‘Scale-ups’!
• Yes, ‘scaling’ is an important dynamic to nurture in the UK economy.
• But, it needs to be deployed across each stage of the growth pipeline:
– Nascent entrepreneurs or start-ups growing
– Accelerating the growth of businesses already showing signs of ambition and
growth
– Getting scaled businesses to scale again and more quickly
• Current discussions about ‘scale-ups’ profoundly unhelpful from a policy
perspective.
• Having started the ball rolling a decade ago with our work for NESTA (i.e.,
the Vital 6%) we are now clearly of the view that:
“There’s no such thing as a High-Growth Firm (or ‘scale-ups’) only firms that
have high-growth episodes”

18. Thank you
More information at http://enterpriseresearch.ac.uk/
Contact us:
Mark Hart mark.hart@aston.ac.uk
This work contains statistical data from ONS which is Crown Copyright. The use of these data does not imply the
endorsement of the data owner or the UK Data Service at the UK Data Archive in relation to the interpretation or analysis of
the data. This work uses research datasets which may not exactly reproduce National Statistics aggregates.