…help yourself to a cup of coffee!

…help yourself to a cup of coffee!

EMC Technical Assistance Project
Andrew Pritchard Director of Policy & Infrastructure

Introduction What is it all about? Some background Your mission today…

What is it all about? A technical assistance project led by East Midlands Councils to provide an evidence base for future EU funding To make sure that we maximise the potential of EU investment across the East Midlands Strong support from DCLG & Council Leaders for the project

Localisation of EU funding
Establishment of a national ‘EU Growth Programme’ LEPs to develop EU investment strategies Each LEP to be given a ‘notional allocation’ of EU funding to prioritise Payments to be made centrally Notional allocations will be reviewed against performance from 2017 onwards

“Show me the money” EU Growth Programme = €6.2 billion
UK Local Growth Fund = £2 billion

In and around the EM D2N2: €249.7 GLLEP: €133.5 LLEP: €126.3
NEP: €55.0 SEMLEP: €88.3 GC&GP: €75.5

UK Local Growth Fund New Homes Bonus £400m
LA Major Transport Scheme £819m Local Sustainable Transport Fund £100m Integrated Transport Block £200m Further Education Capital Fund £330m ESF Skills Match Funding £170M

Emerging UK Priorities
Innovation SME Competitiveness ICT 60% + of ERDF Climate Change Environment Sustainable Transport No Minimum spend Employment Skills Social Inclusion 80% + of ESF Low Carbon Economy 20% + of ERDF

Also… Minimum 20% of combined ESF/ERDF on ‘social inclusion’
Gender equality, equal opportunities & non-discrimination Sustainable development

Programme Timescales September 2013: Draft LEP EU Investment Strategies January 2014: finalise strategies March 2014: new EU Programme starts 2017 – first review of notional allocations

Current Experience Spend under the current ERDF Programme has been slow Too many small projects - difficult to see a strategic impact Original operational programme did not fully meet local needs - e.g. Broadband

Future Challenges 1 region replaced by 7 LEPs – 4 overlapping
Pressure for early spend on projects that will deliver clear outcomes LEP notional allocations to be reviewed in under-performance could be penalised

Threats v Opportunities

What are we going to do? Facilitate a series of consultation events
Develop an evidence base (or ‘socio-economic framework’) to inform both the UK Growth Programme and individual LEP Strategies – working with NTU. Highlight potential areas of collaborative activity that can maximise strategic impact and reduce ‘transaction costs’

Events Diary 1st July: Greater Lincolnshire LEP
5th July: Leicester & Leicestershire LEP 9th July: Competitiveness Round Table 16th July: NEP/SEMLEP 22nd July: D2N2 25th July: Green Economy Round Table

Project Timescales End of July 2013: Interim Report
September 2013: draft Framework December 2013 – final Framework January - June 2014 Awareness raising

Key Outcomes “It’s the economy, stupid” More Jobs Less Worklessness

Your mission today… To think about how best EU funding could be used to improve SME competitiveness To highlight areas or issues where wider collaboration might be helpful. To ask if you do not understand.

Chris Lawton Nottingham Business School
East Midlands PA3 Project Socio-Economic Evidence – SME Competitiveness: East Midlands Regional Roundtable 9th July, 2013 Chris Lawton Nottingham Business School 20

Project Rationale and Objectives
The project aims to provide socio-economic evidence to help identify synergies, linkages and common challenges across LEPs within or overlapping the East Midlands To identify opportunities for collaboration across the themes identified in the ‘Europe 2020’ strategy The UK Government would: “like to see Local Enterprise Partnerships working with each other to deliver a bigger impact… and achieve economies of scale wherever possible” Source: HM Government, April ‘Technical Annex: Preliminary guidance to Local Enterprise Partnerships on development of Structural & Investment Fund Strategies.’ paragraph 2.8, p. 4. 21

Introduction This presentation provides contextual evidence for the EU Thematic Objectives 1 and 3, Innovation and SME Competitiveness Objectives for today are to discuss how to address ‘market failures’ affecting the extent and nature of: private sector spend on research and innovation (innovation inputs) the commercialisation of novel products and processes (innovation outputs) business start-up and survival access to investment We will also provide evidence on the importance of skills and infrastructure to business start-up and high-growth businesses Thematic Objective 4, Low Carbon, will be discussed at a further round-table on the 25th of July 5 of the 11 Thematic Objectives in the European Commission’s ‘Europe 2020 ‘ strategy are prioritised/short-listed in the UK’s Government’s emerging ‘Single England Growth Programme’ (the UK national framework for EU Structural and Investment funding – against which the LEP local investment plans should align): Innovation; SME Competitiveness; Skills; Employment; Low Carbon - together emphasising projects/programmes that contribute to (private sector) output and employment growth/reduce unemployment. Also note preference from both the European Commission and the UK Government for fewer & larger projects/programmes that enable links between objectives. 22

Market Failures Affecting Innovation and Enterprise
Market failures can occur because of : Risk/uncertainty (due to time lags between up-front costs and future benefits) – e.g. return on investment is uncertain Information failure (insufficient information on the benefits of a given activity) – e.g. information on likely returns is incomplete Externalities (where some of the benefits ‘spill-over’ to affect parties other than those involved in the original activity) – e.g. other parties may benefit from the returns Time lags and externalities particularly affect innovation Firms can incur large up-front costs for uncertain future reward It can be difficult for a firm to recoup a sufficient proportion of the benefits (due to spill-overs to other firms and society more widely) The term ‘market failure’ describes a situation in which the free market fails to provide an efficient or socially optimum level of a given good or service. Government intervention can be justified in the public interest - filling information gaps, attempting to reduce risk and incentivise investment (through R&D grants and tax breaks, for example), or regulating to address externalities (for example, protecting R&D investment through patent and IPR laws) 23

Local Enterprise Partnerships within or overlapping the East Midlands Region
Contains Ordnance Survey data © Crown copyright and database right, 2013. 24

Economic Context Chart 1: UK GDP Growth (NIESR modelled monthly estimates), 2008-present compared to previous recessions Data available from the Office for National Statistics demonstrated that UK output (quarterly GDP) contracted much more severely than in previous recessions and has yet to achieve the sustained bounce-back observed following the recessions of the 1970s, 80s and early 1990s. Between the first quarter of 2008 and the second quarter of 2009, real GDP fell by 7.2%. (ONS, 2013). The chart shows the trend in UK output from the first point of negative growth in each recession ( , , , , and 2008-present) up until 57 months from that point, based on estimates of monthly GDP produced by the National Institute of Economic and Social Research. This shows that the UK economy has yet to experience a recovery comparable to previous recessions, including the 1930s (where relatively robust recovery started about 32 months after the first point of negative growth). In a more recent publication (June 2013), the NIESR estimate that output grew by 0.6% in the three months to May 2013, and project an annual growth rate of 0.9% for 2013, increasing to 1.5% in with the private services sector projected to drive growth. However, these growth projections suggest that the UK will remain in ‘depression’ – defined as growth below the pre-recession peak (when ‘recession’ describes a period where growth is falling). The NIESR do not expect output to return to its early 2008 peak until 2015: “unless output turns down again, the recession is over, while the period of depression is likely to continue for some time.” Source: NATIONAL INSTITUTE of ECONOMIC and SOCIAL RESEARCH, November ‘Monthly GDP Estimates’, 25

Chart 2: Headline GVA per head indices (UK=100) NUTS2, 2011
Economic Context Chart 2: Headline GVA per head indices (UK=100) NUTS2, 2011 Note that Lincolnshire and South Yorkshire NUTS 2 areas meet the criteria to be ‘Transition Areas’ in the programme (75-90% of EU GDP per capita) – higher than average allocation of ERDF/ESF and greater flexibility on the Thematic Objectives projects or programmes are aligned to (‘more developed regions’ – all other NUTS2 areas in the chart, at >90% of EU GDP per capita – must demonstrate that at least 80% of ERDF is aligned to the 4 Thematic objectives of Innovation, ICT, SME competitiveness and Low Carbon). A number of NUTS2 areas that are included within/overlap with LEPs covered in this study have experienced more significant decreases in output relative to the UK average (i.e. output has fallen more significantly locally than nationally) – notably D2N2 and South Yorkshire in the north – but also the Bedfordshire and Hertfordshire NUTS2 area (including districts covered by the Greater Cambridge & Greater Peterborough and South East Midlands LEPs). Source: ONS Crown Copyright, ‘Regional Gross Value Added, 2011’. 26

Chart 3: Employment rate (% working age residents), 2012
Economic Context Chart 3: Employment rate (% working age residents), 2012 Areas that experienced the largest falls in employment nationally between 2008 and 2012 tended to be those areas that already had higher levels of unemployment prior to the recession (thus the recession has resulted in a sub-national divergence in labour market performance). In the areas in this study, the picture is a bit more complex – including an urban/rural and a north-south/east-west dimension. LEPs experiencing the greatest fall in employment include D2N2 (-2.2 pp) and Greater Lincolnshire (-2.9pp). A general observation of the UK labour market following the 2008 recession has been the lower than expected (when compared to the recessions of the 1980s and 90s) fall in employment alongside very weak wage growth - below the rate of inflation for much of the 5 year period since 2008, resulting in a very significant squeeze on household incomes and contributing to depressed consumer spending. When compared to the significant contraction in output since 2008, this is often referred to (for example, by Mervyn King) as the ‘productivity puzzle’. Source: ONS Crown Copyright, ‘Annual Population Survey’, January-December 2008 and January-December From NOMIS [accessed 24th June, 2013]. 27

EU Thematic Objective: SME Competitiveness
The SME environment remains difficult, but some signs of improvement: Business death rates have fallen since 2009 and business birth rates have increased But survival rates for new businesses have significantly decreased since pre-recession Small businesses (<50 employees) have been more likely to retain staff but cut/freeze wages and investment, with resulting lost productivity Large businesses (>250) more likely to cut staff whilst maintaining investment and productivity levels Overall productivity has fallen in recent years (and unit labour costs have increased) Source on productivity/staff/wages; Institute of Fiscal Studies (IFS), press release 12th June ‘Workers keep their jobs but one third faced nominal wage freezes or cuts’: Firms with fewer than 50 employees have seen their productivity fall 7% relative to a pre-recession trend, compared to no change for firms with more than 250 employees. Larger firms have tended to lay off workers while smaller firms have tended to reduce wages. Investment has also fallen further in small firms than in larger ones, which may help to explain why productivity has fallen more in small firms than in larger ones. 28

SME environment continued: Weak wage growth may have contributed to higher employment, but may also means that SMEs are substituting cheap labour for investment Lenders report that demand for credit remains low Despite some structural improvements, firms seeking credit continue to report difficulties in the supply of finance Exports have been growing moderately in recent months, in both manufacturing and services Chambers of Commerce QES surveys suggest an increase in business confidence and investment prospects Access to finance is critical if businesses are to invest in additional capacity, innovative activities, skills development or new capital equipment. When surveyed, businesses in the East Midlands, in common with elsewhere, are still raising access to finance as a concern. Other evidence suggests that little has changed in the intervening period and it remains the case that access to finance remains difficult for some businesses. Research on high growth firms suggests that access to capital for expansion is often a key constraint. Opportunities for LEP action in finance are currently unclear, but could include identifying access to finance programmes previously administered regionally that could be delivered at a LEP level, as well as identifying any specific activities that can be delivered through the Enterprise Zone. Source on demand for finance/credit and exports: Bank of England Agents’ Report, June 2013: Credit: “among the firms that had been offered new loans, a proportion had continued to decline them, either because of cash balances that they could draw upon or because they were reluctant to accept the terms and conditions on loan proposals. Some contacts regarded major lenders’ risk appetite as little changed, so that firms with weak balance sheets, or in certain sectors, still struggled to obtain working capital or to finance growth.” 29

Chart 4: Business Births and Deaths (as a % of end-of-year count of active enterprises), 2011 All LEPs in the study area have a lower business birth rate (new registrations for VAT and/or PAYE as a % of the total end of year business stock) than the UK average. The birth rate increased in most areas between 2009 and 2011 – this reflects both a genuine increase in the number of business births over the period, but also a change (decrease) in the stock (the denominator for the rate) over the period. In the East Midlands overall, the business birth-rate increased from 9.4% to 10.3%, reflecting the fact that business births increases from 14,860 to 16,055, but also that the end-of-year count of enterprises fell from 158,120 to 155,270. This was because the number of business deaths significantly exceeded the number of births in 2009 and 2010. Note that business death rates are different to business survival rates: Business death rates refer to all businesses that have ceased trading in a given year, regardless of the age of the business, as a proportion of the total business stock at the end of that year; business survival refers to the proportion of new businesses (‘born’ in a given year) who survive a given number of years, as a proportion of all businesses born in that year. Source: ONS Crown Copyright, ‘Business Demography 2011 – Enterprise Births, Deaths and Survivals.’ 30

SME Competitiveness: Business Birth Rate (as a % of end-of-year count of active enterprises), 2011
Note significantly lower business birth rate in remote rural areas - East Lindsey (7.4%) and Derbyshire Dales (7.5%); Higher rates in accessible rural areas proximate to urban centres – North Kesteven (18.3%); and Higher rates in areas significantly affected by increases in unemployment – Leicester (12.8%), and north Nottinghamshire/Sheffield City Region – e.g. Doncaster (10.9%) and North East Lincolnshire (14.9%). Illustrates importance of connectivity and infrastructure – another requirement of high growth firms – note the pattern of birth rates, and the routes of the M1, A1 and Midlands Mainline. Source: ONS Crown Copyright, ‘Business Demography 2011 – Enterprise Births, Deaths and Survivals.’ Contains Ordnance Survey data © Crown copyright and database right, 2013. 31

Chart 5: Two year business survival rate from year of birth (%)
EU Thematic Objective: SME Competitiveness Chart 5: Two year business survival rate from year of birth (%) Significant decrease in the survival of new businesses – but East Midlands has continued to out-perform UK average. Similar picture for one-year survival rates - East Midlands has gone from 97% of businesses born in 2006 surviving one year to 88% of those born in 2010 (compared to 96.5% and 87% respectively in the UK). Source: ONS Crown Copyright, ‘Business Demography 2011 – Enterprise Births, Deaths and Survivals.’ 32

SME competitiveness not just about start-up and survival, but also about fostering the conditions for ‘high growth companies’: High growth companies: Accounted for 7% of business stock but around 50% of employment growth between 2002 and 2008 Are more resilient (less likely to become insolvent) Are found across urban and rural areas, across sectors, and can be small or large, new or established firms Are innovative (the one common characteristic) High growth businesses are defined as those that experience an average employment growth of 20% per annum over a three year period. Account for between 6 and 7% of business stock in Derby, Leicester and Nottingham. Source for high growth companies research: NESTA, ‘Vital Growth: The importance of high growth businesses to the recovery’, March 2011. The nature of high growth companies makes identification difficult (high growth companies are not apparent until they attain high growth). Additionally, Atherton and Frith (2005) propose a framework to characterise an entrepreneurial region. Although developed at regional level, the characteristics are applicable to Nottingham. They propose that entrepreneurial regions: Have a culture that recognises, encourages and supports entrepreneurs and entrepreneurial ways of working; Have a dynamic business population that is based on i) a healthy start up rate ii) improving levels of survival among newly established businesses iii) a large and rising proportion of businesses that are growing and iv) agglomeration effects that speed up regional growth through clusters, clustering and geographical concentrations of business; and Have institutions and infrastructure that explicitly support and enable entrepreneurial activity and wider macroeconomic conditions that support this activity. A Atherton and K Frith, University of Lincoln, ‘Creating an Entrepreneurial Region: Exploring the entrepreneurial capacity of the East Midlands’, 2005. 33

High growth companies have common needs: Access to finance for growth A skilled workforce Infrastructure that allows for the flow of ideas and knowledge and collaboration A demand for innovative products and processes, stimulated through procurement activities 34

Employment, Social Inclusion and Skills: Resident Adults Qualified to a Level 4 (first degree) and above (%), 2012 Skills – key for high growth businesses - but very unevenly distributed across LEPs – with significant concentrations of low skills – especially on the coast and within the former coalfield areas. Coastal concentration of lower skills (North East Lincolnshire, East Lindsey, Boston and South Holland in Greater Lincolnshire – into Fenland in Greater Cambridge & Greater Peterborough), and highest skill levels to the south of the study area (Northamptonshire Enterprise, SEM and GCGP LEPs) – i.e. the ‘commuter belt’ as well as the ‘Oxford-Cambridge arc’. Source: ONS Crown Copyright, ‘Annual Population Survey’, January-December From NOMIS [accessed 17th June, 2013]. Contains Ordnance Survey data © Crown copyright and database right, 2013. 35

EU Thematic Objective: Innovation
Innovation commonly defined as: “the commercial exploitation of new ideas in the form of new products and processes, new organizational techniques, new markets and new sources of supply” Innovation includes: radical innovation (new product/process) incremental innovation (an improvement to an existing product/process) novel innovations that are new to the market and those that are new to the firm, which reflects the diffusion and transfer of knowledge It is a process, with inputs (e.g. investment in R&D), outputs (e.g. patents etc.) and outcomes Outcomes include an increase in competition, with new entrants displacing incumbents, enhancing the quality of an area’s business stock This churn is part of the way in which the market allocates resources towards more efficient firms and is a feature of high-performing local economies It is extremely difficult to measure innovation. Data that is available tend to be proxies for stages of the innovation process- for example inputs such as expenditure on research & development and outputs such as patents. It is also the case that innovative activity generates ‘spillover’ effects that mean others can benefit from innovative activity undertaken elsewhere. This suggests that, from the perspective of society more widely, a less than optimal amount of innovative activity may take place in an economy, prompting public policy interventions. This has been recognised by the UK government, which has tried to encourage innovative activity through schemes that provide grants for R&D or through tax breaks for R&D. Classically, analysis of UK Innovation Survey data has included the operationalisation of a variable constructed to enable the identification of enterprises that are innovation active. Innovation active enterprises are those that: • have introduced a new or significantly improved product, service or process; • were engaged in innovation projects not yet complete or abandoned; • incurred some expenditure associated with innovation activity such as internal research and development, training, and the acquisition of external knowledge or machinery and equipment UKIS indicators consists of input measures (e.g. expenditure on R&D) and output measures (e.g. proportions of companies introducing new or significantly improved products, patent counts, impact of innovation on revenues). However, for some years the UKIS includes an appreciation of the extent of a company’s involvement in the process of innovation and novelty of outputs (products new to the market) – not necessarily captured in above binary definition Source: C Oughton and M Frenz, ‘Innovation Policy Position Paper’, Birkbeck and University of London. 36

Chart 6: Innovation inputs: Business Enterprise Investment in R&D (as a % of total workplace GVA), 1999 and 2009 Decline between 1999 and 2009 partly reflects the decrease in manufacturing across the UK over the 10 year period. In 2009, East Midlands in-line with the UK average, having previously been significantly higher Note concentration of private sector R&D investment in the South East & East of England – Oxford-Cambridge arc. Also note that decline in R&D investment in East Midlands may have been affected by the loss of a number of important R&D assets – e.g. Astra Zenica in Loughborough. Derived from the annual survey of Business Enterprise Research & Development (BERD) – sample of 4,800 businesses nationally. Includes a census of ‘large R&D performers’ and a sample of smaller businesses identified as ‘lesser’ R&D performers. Government organisations and HEIs are not included in this survey – but in a wider measure of Gross Expenditure on R&D (GERD). Source: Department for Business, Innovation and Skills, ‘Regional Economic Performance Indicators – Live Tables’. 37

EU Thematic Objective : Innovation
Chart 7: Employment in High and Medium-High Technology Industries (% work-based employment), 2011 EU average is 3.7% (2011) – GB is lower, with Northamptonshire in-line with the EU. East Midlands average is 3.9%, with D2N2 significantly higher – 4.4%. EU (Eurostat) definition – used by BIS - It is defined by grouping together a range of manufacturing sub-sectors who are involved in or making use of highly advanced technological development or devices, mainly the use of electronics, and are characterised by a high ‘technological intensity’ (measured by R&D spend/total value added in the sector). Definition: High and medium-high tech industries (SIC 2007): Chemicals and chemical products Basic pharmaceutical products Computer, electronic and optical products Electrical equipment Other machinery and equipment Motor vehicles Other transport equipment (excluding manufacture of ships and boats) Repair and installation of machinery and equipment Source: ONS Crown Copyright, ‘Business Register and Employment Survey, 2011.’ Data accessed from NOMIS [17th June, 2013] and analysed under Chancellor’s Notice Ref NTCBRES11-P0537. 38

Innovation: Employment in High and Medium-High Technology Industries (%), 2011
Note concentration of high-tech industry in Derby (12.2%), South Derbyshire (12.3%), North West Leicestershire (5.3%), Charnwood (5.9%) and Hinckley and Bosworth (10%) – M1 corridor, airport and ‘midlands aerospace cluster’ Sub-sectors: Electrical equipment (Charnwood); aerospace and rail (Derby) and machinery and equipment n.e.c. (Hinckley and Bosworth and North West Leicestershire); and automotive (South Derbyshire). Source: ONS Crown Copyright, ‘Business Register and Employment Survey, 2011.’ Data accessed from NOMIS [17th June, 2013] and analysed under Chancellor’s Notice Ref NTCBRES11-P0537. Contains Ordnance Survey data © Crown copyright and database right, 2013. 39

Chart 8: Innovation outputs: Turnover attributable to new and improved products (%), 2006 Derived from the UK Innovation Survey (UKIS)/Community Innovation Survey (CIS) (UKIS is the UK version of the EU-wide CIS). The survey covers aspects of innovation including the constraints faced by businesses, the impact of innovation on businesses and features of the wider innovation process. Most questions are asked about innovation activities carried out by firms over a long period (2006 to 2008 for example). The data on the percentage of turnover attributable to new/improved/novel products presented is an exception, the question relating to the final year of the survey period only. Source: Department for Business, Innovation and Skills, ‘Regional Economic Performance Indicators – Live Tables’. 40

Chart 9: Innovation outputs: Turnover attributable to new and improved products (%), 2009 Overall decline in innovation outputs (as a % of turnover) concentrated in a small number of sectors – particularly transport equipment and manufacturing n.e.c. – likely to represent a change in behaviour in a very small number of large, innovation-active firms. For example, we know Toyota faced a range of problems through (global product recall etc., as well as decline in demand due to recession), which may have caused a significant cut-back in innovation activity. Demonstrates that, although most LEPs in the East Midlands have a number of globally important, R&D intensive firms, overall innovation activity is significantly affected by the circumstances and behaviours of this relatively small number of companies. Source: Department for Business, Innovation and Skills, ‘Regional Economic Performance Indicators – Live Tables’. 41

Summary Points Signs of improvement in the business environment: indicated by increased business births/decreased business deaths and more positive survey responses But SMEs continue to face significant challenges: indicated by lower survival rates and continued difficulties in accessing finance High growth businesses are responsible for a disproportionate level of new jobs and are more resilient Innovation is the key common characteristic amongst high growth businesses However, they are very difficult to identify before they attain high growth – its is important to create a supportive environment These businesses require skills, growth finance, an infrastructure that supports innovation and knowledge transfer, and demand for innovative goods and services Manufacturing accounts for a large proportion of innovation spend and outputs, but this can be concentrated in a small number of large firms North-south or east-west (depending on topic) divides across the region have been exacerbated by the recession – strengthening the rationale for joint working for some LEPs Further work (Stage 2 – from September 2013) - will include foreign direct investment; business investment (capital expenditure); trade and trends in exports. Literature review on innovation, enterprise and low carbon topics – including relevant LEP & Local Authority research published so far. Feedback from delegates at the six events will inform the direction of this further work. 42

How Can we use EU Funding to…
Increase private sector spend on R&D Deploy innovation more widely amongst SMEs Increase business start up & survival Increase access to investment by SMEs

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