[FIGURE 8 OMITTED]

How have growth expectations changed? What we find for virtually all size classes is that growth expectations were lower in 2004 than they were in 1991, even though we were asking questions in very difficult economic circumstances at the beginning of the series. So the massive amount of government support has not led to any improvement in perceptions of growth prospects for small businesses, nor is there any evidence that it has it affected their actual growth rates very much.

What about factors limiting firm ability to grow? In all our surveys we've asked the same questions about a long list of possible constraints to growth. These have included market demand, internal business skills and access to finance. In various combinations these factors are always at the top of the list of constraints in survey responses. If we focus on these what we see is that for all firms the major difference over time is a reduction in capital market constraints. In Figure 9, on the line representing 1991, you can see that the perception of constraints rapidly move in for finance and market factors, but for capability and skills there is a tendency to move out. What is difficult to do is separate the micro effect of the fact that that they were operating with 15% interest rates at the beginning, and much lower rates later, and the impact of government policy.

It is, however, interesting to note that, over time, if you look from one survey to the next there is an increasing emphasis, both in relation to overall firm objectives and innovation objectives, on constraints arising from skills and from management capabilities. So the skills agenda remains a very important factor that has persisted despite the large expenditure in support of skills and training and, moreover, the small firms have felt most constrained by skill factors in every survey.

[FIGURE 9 OMITTED]

What about changes in the performance in terms of innovation, training and export? These are major areas of government support but in fact there was hardly any change in the proportion of firms exporting; it rose a bit and then it fell. The proportion training hardly changed and there is very little change in innovation performance (see Figure 10).

What about R&D? Well, it hardly changed. The smaller firms increased a bit and the medium sized ones did, but for all firms in total, that is firms up to 500 employees, there has been very little change.

What about venture capital? We have data on venture capital from the British Venture Capital Association which show the level of investment increasing a little bit. The UK venture capital market is indeed the most advanced in Europe and expanded rapidly over this period to nearly 10 billion [pounds sterling] in 2004. Two-thirds of the money that is invested is raised abroad however, and does not come from the UK in response to the UK investor incentives; 45% of funds go overseas. Moreover of the 5.3 billion [pounds sterling] invested in the UK only 6% was for start-ups and early stage businesses. Venture capitalists put most of their money into large-scale management buyouts and of course they have done it, most recently, against a background of easily available cheap debt. It has not produced a really big impact at the bottom end of the market. Now this is exactly what you might expect to happen. This is a very risky and high cost area for anybody to invest in, but in the US public sector investment schemes helps de-risk a lot of this early stage activity and that means that the venture market can quite naturally enter at later stages.

Finally, what about firm collaborations? This is a very important issue in relation to thinking of a boojum or systems analysis rather than a snark-based individual firm approach. The data shows that collaborative activity has been increasingly steadily since 1991 (see Figure 11).

By 2004 44% of the firms in our sample reported they had a collaborative link with another organisation. The most frequent links are with customers and suppliers. It is also the case that the data in our sample and from other studies shows that links with the higher education institutions have been growing, especially since 1997. There is also other data which shows there is some increase in spin out activity, but quite a big increase in licensing. In 1991 suppliers and customers as collaborators were much more important relative to universities than they were at the end of the survey series, whereas the collaboration with others increased too but to nothing like the same extent.

But there is a paradox in all this. The UK has massively increased links between small firms and universities, but in another piece of work which I reported on in Australia last year (3) comparing the UK with the US, the UK firms value their interfirm links relatively highly compared to the US but they place much less value on intermediary organizations, and they place relatively very little value on links with universities compared to US firms (see Figure 12).

One way of thinking about collaboration is to categorise the various sources of knowledge for innovation into direct sources, which are customers and suppliers, intermediary organisations and then the science base. Here we can use the data developed for the UK and the US in Cosh, Hughes and Lester (2005). The grey figures in Figure 13 show the proportion of US firms that report they have a link, and the black shows the UK. The first thing to look at is customers and suppliers. As Figure 13 shows, nearly everybody has a link with a customer and a supplier, but hardly anyone relies on them alone.

[FIGURE 12 OMITTED]

Thus, if you ask the question 'whom do you collaborate with, and only with?' there is hardly anybody who just collaborates with customers and suppliers: they all use another source as well. Then if you ask, 'do you collaborate with at least one company source and one intermediary source?' a very dense network structure appears in the US. On the other hand when we ask how many firms collaborate with at least one organisation from each of the three broad groups, the UK moves ahead. 80% of UK firms are involved with these three-group relationships, whereas only 50% of the US firms are. Now there is an important question behind this, which is how dense, how extensive and how widespread a system of inter-relationships can be for it to be successfully managed and to yield value? It may be that the UK has a very weak, dispersed set of relationships, and that is maybe why it does not, for example, value its university links as much as its US counterpart sector does. I emphasise that this is speculation on my part, but I think it is an interesting and important issue. This raises the question, in thinking through an innovation support policy, of what might be the optimal framework for collaboration. What combination of relationships is the most appropriate--given the technology, the market structure, and the appropriation conditions--to allow small firms to operate most successfully in their environment?

If multiple links are difficult to manage, there may be a trade off between intensive as against extensive connections. This is an important question in the context of open innovation systems.

I will now try to draw out some conclusions about overall trends. The scorecard appears a disappointingly mixed bag, given the huge expenditures on SME support. The bad news is that, in aggregate terms, the SME sector has not increased in significance in the UK. SMEs are growing less fast than in the past. Maybe this reflects the increasing importance of constraints arising from a lack of management skills, and internal capacities to manage growth within an increasingly competitive and increasingly technically sophisticated set of markets. There is, as we have seen, a substantial skills support budget so the remaining question is whether the support is directed to the right areas in the right way given that the incidence of training has not increased. There is very little evidence of R&D increasing, but then I am rather sceptical about just how important R&D is per se, as opposed to a range of other activities. Venture capital is still focussed away from start-ups and small firms, and the incidence of innovation and exporting has not gone up much, taking all small firms together.

The good news is that there is some improvement in innovation in the 10-49 employee firm category. Constraints from the unavailability of finance are definitely less, and collaborative activity is rising but the question of its quality remains. So the overall aggregate conclusion is a disappointing mixed bag and I think this is increasingly the feeling in the UK. Just as I left there was a major rationalisation programme launched by the small business service. The idea is to reduce the number of programmes from 3000 to 100. I'm afraid lots of Snark related programmes will begin to disappear. There has been a major restructuring of the bureaucracy. The Department of Trade and Industry is no longer a department and the Department for Education and Skills has been restructured, so we now have three new, easy acronyms for the trainee policy advisor to remember: DERR, DIUS and DCSF. The Department for Enterprise and Regulatory Reform has taken that part of the DTI that was not related to science-based innovation. The rest has gone to a Department for Innovation University and Skills, and the higher education and vocational skills agenda has been moved from the Department for Education and Skills into this new organisation. The DFES itself is no longer--it is now a Department for Children, Skills and Families, focussing on a younger age range. And the ultimate fate of the Snark seeker, the Small Business Service, has been scrapped and is now a new directorate within the Department for Enterprise and Regulation Reform.

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