Articles
Mind the enterprise gap
by Dermot FinchLEDIS - 01 March 2006
Promoting enterprise in areas of deprivation is one of the Government’s key economic policy goals - and a very difficult one to achieve. High levels of deprivation are strongly correlated with low levels of enterprise. But the cause and effect dynamic is less clear.
So why doesn’t enterprise work so well in deprived areas? What are the links between enterprise and deprivation? Do higher levels of enterprise reduce deprivation? And has Government policy helped to promote enterprise and job creation in deprived areas?
Despite lots of policy initiatives, from Enterprise Zones through to the Local Enterprise Growth Initiative (LEGI), we still know surprisingly little about all this. For example, what are the barriers to business location and growth in deprived areas? And how should these be overcome?
The Centre for Cities is looking into this. We are a new urban policy unit, based at the Institute for Public Policy Research (IPPR), and we focus on the economic drivers behind urban growth and change. One of our first major research projects, ‘City Markets’, is examining the issues around building enterprise in deprived areas - in places like Sunderland, Derby and Doncaster.
I set up the Centre after 11 years at the Treasury, where I helped devise a lot of Gordon Brown’s enterprise policies. I brought the Inner City 100 over from the US, along with the New Economics Foundation and the Royal Bank of Scotland. I worked with Sir Ronald Cohen on the Social Investment Task Force, which led to the Community Investment Tax Relief (CITR) and Bridges Community Venture Fund. And I helped set up the Phoenix Fund.
Five years on, we’ve got a very mixed picture. Critically, the UK economy has enjoyed a decade of macro stability and steady growth. This, more than any Government policy or initiative, has helped to boost business and employment growth across the UK, including in deprived areas. But in the last year, as the economy has cooled, we’ve seen business activity rates start to level off.
First, our most deprived areas have benefited from unprecedented amounts of public investment in education, health and community safety. But despite this, many low-income areas are still cut off from the vibrant economic areas around them.
Second, deprived areas have shown that they can be attractive places to do business, as demonstrated by the Inner City 100. But they still present some real barriers to business location, such as poor connectivity, low skills and relatively high crime.
Third, new players like Community Development Financial Institutions (CDFIs) have started to take root in deprived areas, providing alternative models of business finance and support. But they are still relatively marginal, and are struggling to build up their capacity and impact.
We also have a rather confusing mechanism for delivering many of the Government’s enterprise programmes. Enterprise Areas operate in nearly 2,000 of our most deprived wards. They all qualify for a range of locally targeted fiscal measures, such as Community Investment Tax Relief (CITR). But awareness of Enterprise Areas among qualifying firms is very low, which undermines their effectiveness. This is partly due to poor communication, but also poor spatial targeting. The very local area-based focus of Enterprise Areas does not match well with the reality of how markets work in practice. I’ll return to this later.
Meanwhile, LEGI is about to start its first full year this April. This is the latest effort from the Treasury to promote enterprise in deprived areas. Over the next three years, it will invest £300 million in a targeted number of our most deprived areas, to support start ups, business growth and job creation.
So now is a good time to take stock of progress so far. Last year, the Centre for Cities surveyed 350 businesses in deprived areas in Derby, Doncaster and Sunderland. We asked about the market factors affecting business location in these areas, and about the real impact of enterprise initiatives. ‘Mind the Enterprise Gap’ (December 2005) revealed three key findings:
Deprived areas need to identify and build on their assets, such as strategic location or available labour pool. Connectivity was a key asset for most of the businesses we surveyed. Those places that are well connected to surrounding markets tend to do better than those that are not.
Business support schemes such as Business Link are not well recognised, and are of variable quality. Those who use Business Link are reasonably satisfied, but penetration into deprived areas is not high enough.
The benefits of Enterprise Areas are hardly used at all - only 2% of our 350 businesses had used any of them.
Our ‘City Markets’ work is now looking more closely at the implications of these findings - for businesses in deprived areas, and for Government policy. Here’s where we’ve got to:
First, we are testing the relationship between enterprise and deprivation. For years, the Treasury has encouraged us to believe that boosting enterprise automatically reduces deprivation - and in particular, that more business start ups are the key to creating more jobs.
We are not convinced. For too long there has been something of an obsession with start ups in deprived areas. Start ups, by definition, do not actually create that many jobs, compared with the growth of existing businesses, franchises and inward investment. So we welcome the focus of LEGI, not just on start ups but also on other types of business activity that represent stronger sources of job creation. Regional Development Agencies (RDAs) and others in Government need to take note.
Second, we are taking a critical look at the Government’s area-based approach to promoting enterprise in deprived locations. We understand why the Government has set up Enterprise Areas - to correct market failures and to target assistance to the most deprived areas. But deprived areas do not operate in isolation - they are surrounded by more vibrant areas. Rather than promoting enterprise, Enterprise Areas could actually be setting deprived areas further apart and reinforcing a culture of grant dependency.
We see three specific problems with Enterprise Areas:
They are too small to be effective. Our ‘City Leadership’ work on financial devolution reported on 24 February. It concluded that economic development is best done at the city-regional level - not at the ward or local authority level.
They are too centrally driven. Enterprise Areas are the creation of central Government, containing the same centrally devised initiatives. They are not tailored to local or city-regional economies.
They tend to produce anomalies. For example, a business located outside an Enterprise Area, employing residents inside it, does not qualify for support. And a business inside an Enterprise Area, employing people from outside, does qualify. This cannot be right.
Area-based enterprise initiatives need to be smarter. For example, tax abatements on the development of land in deprived areas make sense, and would help lower risk and stimulate investment in those areas. But financial incentives aimed only at businesses located in deprived areas make less sense - they should instead be aimed at businesses that invest in deprived areas, whether they are located there or not.
Third, we are assessing the effectiveness of the current policy framework. There are currently far too many different enterprise programmes in operation, each of them quite small. As the Treasury gears up for next year’s Comprehensive Spending Review, many of these programmes will come under close scrutiny. We would urge the Treasury to focus on those enterprise programmes that help create employment in deprived areas. And we would only support incentives that reward not only business location in deprived areas, but also investments that actually reduce deprivation.
Business support is not working as well as it should in deprived areas. Although the firms in our survey were reasonably satisfied with Business Link, there are clearly problems surrounding the penetration and quality of business support. Anecdotal evidence strongly suggests that Business Link could do better. Their recent shift from the Small Business Service (SBS) to the RDAs has not helped. Also, most businesses get advice and support from elsewhere, especially from their accountants. We would like businesses in deprived areas to have better access to high-quality advice and support, perhaps through a voucher system. The Government has a responsibility to fund some of this, but private providers should be encouraged, too.
Tax incentives for businesses in deprived areas are not working well. The CITR has attracted disappointing levels of investment so far. It is not clear whether the incentive is poorly designed, or whether it has been poorly promoted - or both. Interestingly, our survey respondents did not list access to finance as a major concern. The CITR would certainly benefit from better promotion, but it also needs to be tied more closely to job creation. And given that it is routed through CDFIs, the CITR will only succeed if we have a better CDFI sector. The Community Development Finance Association (CDFA) is working hard on this, but needs more support from the Government.
Ultimately, though, the enterprise policy toolkit in deprived areas is marginal. Business activity is dependent not on any particular initiative, but on broader market factors such as the availability of suitable premises, the dynamics of the labour pool and good transport connections. For example, the labour market in Sunderland is tighter than it should be because of the relatively low levels of workforce skills and limited available commercial office space. This means that potential new employers are unable to locate there. And regarding transport, it is quite clear that towns in Cumbria and Cornwall, for example, fail to attract new businesses because of their poor connectivity.
Boosting enterprise in deprived areas is a good policy goal. But the causal links are not clear. Enterprise policy to reduce deprivation should focus more closely on addressing the sources of deprivation, and should link more directly to job creation. But at the same time, policy interventions should be careful not to distort market decisions. Enterprise policy should also focus not on deprived areas in isolation, but on deprived areas as part of a wider economic area. Policy makers and investors should seek to build on the assets of deprived areas, and connect them to their more vibrant surrounding economies.
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