One reason why we get bad policies

If the What Works Centre for Local Economic Growth didn’t exist someone would have to invent it. It analyses policies to see which are the most effective in supporting and increasing local economic growth. Although its focus is local, most of its findings have national implications. So far, the centre has looked at a number of policy areas. A theme cutting across all of its findings is that to a large extent we don’t really know what works. Too often, the evidence is inconclusive or lacking.

On access to finance:

• We found very few studies that look at the impact of schemes on both access to finance (direct effect of the scheme) and on the subsequent performance of firms (indirect effects of the scheme).
• While most programmes appear to improve access to finance, there is much weaker evidence that this leads to improved firm performance. This makes it much harder to assess whether access to finance interventions really improve the wider economic outcomes (e.g. productivity, employment) that policymakers care about.
• As with other reviews, we found very few studies that gathered (or had access to) information on scheme costs. As a result, we have very little evidence on the value for money of different interventions.

On business advice:

• There is insufficient evidence to establish the effectiveness of sector specific programmes compared to more general programmes.
• We found no high quality impact evaluations that explicitly look at the outcomes for female-headed or BME businesses.
• We found two high-quality evaluations of programmes aimed at incubating start-ups. Both programmes were targeted at unemployed people and show mixed results overall. However, there is a lack of impact evaluation for Dragons’ Den-type accelerator programmes that aim to launch high-growth businesses and involve competitive entry.

On employment training:

• We have found little evidence which provides robust, consistent insight into the relative value for money of different approaches. Most assessments of ‘cost per outcome’ fail to provide a control group for comparison.
• We found no evidence that would suggest local delivery is more or less effective than national delivery.

As the above suggests, on key areas of government policy we lack evidence of what works, particularly when it comes to determining value for money. Given the billions spent on various schemes this simply isn't good enough.

The way to move forward from this is to work backwards, ensuring that a robust framework of analysis is build into each and every government programme so that we can know how successful (or otherwise) each intervention is. Crucially this should be done in a way that lets it be compared by the same metrics also being measured in other schemes trying to achieve similar outcomes.

Residing in the economic departments of our universities are the brains to do exactly this – to date though, policymakers have lacked the gumption to systematically experiment, measure and evaluate what works. Until they do we will just keep getting ad hoc policies with enough Rumsfeldian known unknowns to make an economist cry.

Philip Salter is director of The Entrepreneurs Network.

Government loans for master's students is a risky business

The chancellor announced a student loan system for postgraduate master's degrees in the Autumn Statement. Although many have praised the move, it risks doing more harm than good. There are the obvious unintended consequence of encouraging students to undertake courses that aren't in their (or taxpayers') best interest, but here I'll focus on risks to the nascent funding market for postgraduate loans.

It's certainly a popular policy. As the FT reports: "Universities, unions and business groups have reached rare agreement in welcoming new £10,000 loans intended to ‘revolutionise’ the support available for students taking postgraduate degrees." But the devil will be in the detail. Just consider the Student Loans Company, which MPs recently requested face an inquiry following the ‘persistent miscalculation’ of money paid out in loans that will not be repaid. But more important than the wasted money, the government’s intervention in the postgraduate student loan market risks crowding out private sector solutions.

The failure of the Professional and Career Development Loans (PCDL), which are already subsidised by the government through the Skills Funding Agency, is principally due to banks being ill-suited to lending to students (and one the main reasons for this is because of excessive banking regulation). The analogy with SME business lending is the right one – students, like SMEs, are risky and banks are no longer best placed to lend to them.

Smaller and leaner companies can fill the gap where banks fear to tread. As we have seen with Santander’s partnership with Funding Circle in SME finance, the banks know that nimble companies have the skills to plug gaps in the market. In fact, entrepreneurial companies like Future Finance, StudentFunder and Prodigy Finance are already responding to the demand for loans for postgraduate studies.

Whether the bulk of the money comes from peer-to-peer (P2P) investors, alumni or universities themselves, the plurality of the private sector would trump the one-size-fits all approach that the government could take. We are on the verge of the equivalent of the funding revolution we are seeing in SME finance but this intervention risks stymieing it.

All is not lost. The government will consult on how to put the policy into practice and here they have the opportunity to do less harm than copying the PCDL model. As with SME finance, the government could funnel the loans through providers already in the marketplace. And, most importantly, government needs an exit strategy so that we don’t see mission creep and the destruction of a private sector solution.

Philip Salter is director of The Entrepreneurs Network.

Our visa system is failing international graduate entrepreneurs

The Entrepreneurs Network has just released a new report. Based on a survey of 1,599 international students, Made in the UK: Unlocking the Door to International Entrepreneurs reveals how the UK’s visa system is failing international graduate entrepreneurs who want to start a business in the UK. Undertaken with support from the Adam Smith Institute and in partnership with the National Union of Students (NUS), we find that a significant proportion of international students – that is students coming from outside the EU – have entrepreneurial ambitions. In fact, 42% of international students intend to start their own business following graduation. However, only 33% of these students, or 14% of the total, want to do so in the UK. Clearly we are doing something wrong.

The Tier 1 (Graduate Entrepreneur) visa was set up in 2012 to encourage international graduates to start their businesses when post-study routes were taken away. However, uptake has been woeful and the results of the survey suggest this isn’t likely to change any time soon:

• Just 2% of respondents intending to start a business following graduation applied for the UK Tier 1 (Graduate Entrepreneur) visa, with almost two thirds, 62%, saying they didn’t even consider it.
• Nearly half, 43%, of respondents think their institution is certified to endorse them for a Tier 1 (Graduate Entrepreneur) visa.
• Only 18% think that the UK has better post-study processes in place for international students than other countries; 32% think it is worse than other countries.

Based on these and further findings, the report puts forward nine recommendations for government, including:

• Removing the Tier 4 ban on self-employment for those working within an institutional programme (curricular or co-curricular) or other accelerator.
• Allowing UKTI-approved accelerators to endorse international students in their programmes under the Tier 1 (Graduate Entrepreneur) scheme.
• De-coupling the risk for educational institutions in endorsing international graduates for Tier 1 (Graduate Entrepreneur) visas from institutions’ Tier 4 license. This should be made explicit in the official Home Office guidance and in the way the Home Office applies its audit procedures for institutions.
• Reinstating a post-study work visa, de-coupled from the sponsor system, to allow international students to explore markets and industry before finalising their business idea for the Tier 1 (Graduate Entrepreneur) application. In fact, 81% of the respondents considering starting their own business are interested in the possibility of permanent residency under the Tier 1 (Graduate Entrepreneur) visa.

Our visa system isn’t supporting the entrepreneurial ambitions of international graduates. As things stand, we are training some of the world’s best and brightest young people at our world-class universities only to push them to set up their businesses overseas.

Philip Salter is director of The Entrepreneurs Network.

Releasing data could help Britain's entrepreneurs scale-up

The celebrated entrepreneur, investor and adviser Sherry Coutu CBE has just released a detailed report on scale-up businesses. Scale-ups are defined as enterprises with average annualised growth in employees or turnover greater than 20 per cent per annum over a three-year period, and with more than 10 employees at the beginning of the observation period. The Scale-Up Report explains how “a boost of just one per cent to our scale-up population should drive an additional 238,000 jobs and £38 billion to GVA within three years”...“[I]n the medium-term, assuming we address the skills-gap, we stand to benefit by £96 billion per annum and in the long-run, if we close the scale-up gap, then we stand to gain 150,000 net jobs and £225 billion additional GVA by 2034.”

The report identifies key issues for helping these companies grow:

• Finding employees to hire who have the skills they need
• Building their leadership capability
• Accessing customers in other markets / home market
• Accessing the right combination of finance
• Navigating infrastructure

Twelve recommendations are put forward, but the first (arguably) offers the biggest bang for its buck:

Recommendation 1. National data sets should be made available so that local public and private sector organisations can identify, target and evaluate their support to scale-up companies, and evaluate their impact on UK economic growth.

The specific data required includes:

• Company registration number
• Revenue (UK and export)
• Location of headquarters and plant
• R&D tax credit (recipients and amount)
• Employment data (number of pay slips issued in a given month)

It is suggested that data “should be made available on a real-time basis openly or to a cross-departmental scale-up support unit within government. This would allow both public and private sector organisations to target scale-ups accurately to make sure support is offered at right time to the right leaders.”

Releasing this data wouldn’t add to the bureaucracy faced by entrepreneurs. As the report explains, companies are already required to submit turnover data annually to Companies House, report on PAYE in real-time, file quarterly VAT returns, and report on the amount the spend on R&D (if claim R&D Tax Credits). However, as the report acknowledges, releasing this data raises questions around data privacy. To counter this criticism, the report uses the example of the Cambridge Cluster Map, where this sort of data is already collated, and 59 companies have asked to be included in it since its initial launch.

Also, following a YouGov survey, the report reveals: “83% of scale-ups were in favour of the government sharing information on their company growth with other government departments or agencies, and 72% were in favour of government sharing this externally.”

But this leaves a minority of companies unwilling to open up their data willy nilly. The report doesn’t offer any guidance on how to deal with these concerns but there should be a way for companies to opt out. If, as the report reasonably suggests, these companies are then better targeted for support, those that have opted out will surely be all too ready to release their data too.

Philip Salter is director of The Entrepreneurs Network.

Mazzucato versus Worstall and Westlake

Marianna Mazzucato’s 2013 The Entrepreneurial State is the most influential book on innovation. Although Mazzucato’s arguments in the book and beyond are many and varied – for example, I’m particularly sympathetic to her scepticism of the uncritical financial support for small businesses – the arguments gaining the most traction are the least convincing and potentially most damaging. In short, Mazzucato’s thesis is that the state has been the key driver of “innovation” and should therefore take a more active role than they currently do. Central to this, is the policy suggestion that government agencies that fund this innovation should take a cut of the profits from the inventions. Two writers have convincingly unpicked this – the Adam Smith Institute's Tim Worstall and Nesta’s Stian Westlake.

First, on the point about states driving innovation, Worstall cites William Baumol, who makes the crucial distinction between innovation and inventions. In reference to Mazzucato’s observation that the key technologies that went into making the iPhone were state funded Worstall explains: “Baumol's point is that the private sector could have come up with these technologies, even though it was the state that did. But only the private, or market, sector could have come up with the iPhone.”

To put it another way, the iPhone is more than the sum of its parts. In an excellent article (worth reading in full), Westlake cites the work of Jonathan Haskel, which “suggests that for every £1 that British businesses spend on R&D, they spend £8 on other intangible investments of the sort that Apple used to make the iPod a success: design, new business models, marketing and software development.”

But perhaps Mazzucato’s biggest mistake is one of policy. As Westlake explains elsewhere, in The Entrepreneurial State Mazzucato suggests that “the state should find ways to share directly in the profits of companies that benefit from government innovation spending. A repayment system needs to 'reward [the government for] the wins when they happen so that the returns can cover the losses from the inevitable failures.'”

Westlake outline three convincing reasons why this wouldn’t work: “it would be nightmarish to administer; it imposes costs on exactly the wrong businesses, creating both a presentational and a practical problem; and it’s worse than an already existing option – funding innovation from general taxation.” Westlake's last point cuts to heart of the problem. As Worstall has pointed out in a response to Mazzucato’s response to his criticism of her work:

That governments sometimes produce public goods should not be a surprise. That’s what governments are for in fact. To provide collectively those things that cannot be provided through voluntary cooperation. To then complain that government doesn’t get extra rewards for doing the very thing we institute it for seems most odd. That’s why we pay our taxes in the first place: in order to get those public goods. Why should there then be some extra appropriation when all government is doing is what we asked it to and paid for it to do in the first place?

Philip Salter is director of The Entrepreneurs Network.

Size might not matter but age definitely does

It’s ironic that politicians are so obsessed with creating jobs, given that many interventions – such as employers’ national insurance contributions and a politically determined minimum wage – achieve the diametric opposite. Yet it remains a key metric for determining political success and failure, and it drives much that passes for entrepreneurship and enterprise policy. When it comes to job creation there is a debate about whether small or large businesses contribute more. Those representing small businesses can claim that micro businesses account for around 95% of all private sector companies, while those representing large businesses can counter that despite making up less than 0.1 per cent of the total private sector stock, large businesses account for more than half of all turnover and more than 40% of UK private sector employment.

It’s a complicated debate. Nesta research suggests a small proportion of businesses are responsible for the majority of job growth, with the data showing that “just 7% of businesses are responsible for half of the jobs created between 2007 and 2010.”

Elsewhere, Nesta suggests focussing government resources on supporting what was then “the vital 6%” . But it isn’t obvious that this is the right conclusion from the data. It’s entirely possible that current polices are limiting the size of this so-called vital 6% job-creating companies. If this were the case, instead of focussing on those businesses and sectors already succeeding, the right policy would be the exact opposite: focusing on increasing that 6% figure by targeting companies not in the 6%.

Although the ideal ratio of small to large businesses might be indeterminable, we do know one thing. Size might not matter but age definitely does: we want new businesses. As the Kaufman Foundation explains: “Policymakers often think of small business as the employment engine of the economy. But when it comes to job-creating power, it is not the size of the business that matters as much as it is the age.”

Therefore, politicians and policymakers should want the entrepreneurial process to happen quickly; they should want to make sure regulations don’t inhibit the process of business creation and destruction; they should, to paraphrase the lean startup, want entrepreneurs to start fast, grow fast and fail fast.

Philip Salter is director of The Entrepreneurs Network.

The tax system is the biggest barrier to growth

Outside of academic papers that too rarely see the light of day, most "research" is unremarkable in its optimism about the state of entrepreneurship in the UK. That’s why the RSA’s Growing Pains: How the UK became a nation of “micropreneurs” caught my eye. It paints a stark picture. The UK, according to the report, has become a nation of micro businesses, while the proportion of high-growth businesses has plummeted: “UK businesses are becoming increasingly micro in size – reducing the overall potential for economic output and future growth, and increasing the economy’s reliance on a relatively small number of larger businesses.”

Since 2000, the proportion of businesses classified as micro (0-9 employees), as a share of all UK businesses has grown from 94.3 per cent of all private sector companies to 95.4%. This represents an additional 1.4 million micro firms and an increase over the same period of 43%.

“At the same time, the proportion of high-growth enterprises has declined sharply, falling by more than a fifth in the majority of regions since 2005.”

Although the number of high-growth firms is expected to rise over the coming years, the report cautions optimism: “performance is expected to remain below 2005 levels in all regions except London”.

So how can we solve the problem? According the entrepreneurs, the tax system (44%) is the biggest barrier to growth – ahead of a lack of bank lending (38%) and the cost of running a business (36%).

Another problem highlighted by the report is that entrepreneurs don't know what the government is up to:

“Around three-quarters (73%) of small business leaders also say the Government must make it easier for SMEs to access the right information and support for growth. While several of the Government’s recent incentives to support SMEs are designed to address the top-cited barriers, perhaps this information is not reaching the people who need it the most.”

Two polices are put forward in the conclusion to help entrepreneurs. First, “continued reform of the apprenticeship scheme could help micro firms to grow out of this business size category”. Second, “more tax relief like the National Insurance holiday could also pay real dividends.” It would be worth exploring the former in detail (something I plan to work on), but I don’t think another NI holiday goes nearly far enough: Employers' National Insurance should be scrapped entirely. And no just for small businesses.

Being an entrepreneur is tough. As the report points out, “the majority (55%) of new businesses don’t survive beyond five years.” Scrapping Employers' NI is the logical place to start.

Philip Salter is director of The Entrepreneurs Network.

Tired of London?

Samuel Johnson famously pronounced: “when a man is tired of London, he is tired of life”. This isn’t the end of his statement though, he added: “for there is in London all that life can afford.” But what if you can’t afford life in London? Surely then it is time to up sticks and move to a cheaper city.

According to a poll from the Supper Club, the network for entrepreneurs turning over £1m or more, 40pc of London-based business owners have considered moving their operations.

More than a third claimed that the cost and inefficiency of London’s public transport system is holding back businesses, while 40pc said that the cost of housing is driving away the best talent. With house prices in London reaching an all-time peak, business owners have warned of a “brain drain”.

The Supper Club, which represents 330 entrepreneurs from a range of sectors, found that 79pc of respondents fear a skills crisis within five years.

Of course, for as long as London remains a leading world city – at the cutting edge of finance, business and culture – it will remain a pricey place to live. After all, there is a flipside of the economies of amalgamation – some stuff, like housing becomes more expensive. And yet, there can be no doubting that house prices are hitting crisis point. For Generation Y, many can’t foresee how they will ever be able to own property in the capital. London’s big divide is between the owners and the renters and successive governments’ failure in allowing more houses to be built is squarely to blame.

To give you a sense of the crisis, Shelter’s model predicts that fewer than 1 in 5 of London families will be able to become owners by the age of 65 if prices inflate as they have done in the past.

As the LSE’s Paul Cheshire points out, politicians haven’t stepped up to the plate. The coalitions’ Help to Buy policies are doing little (except pushing up prices), while Labour’s suggestion for partial controls on rents, increased security of tenure, and elimination of agent’s fees for finding housing for renters, will probably just decrease rental supply as fewer people want to become landlords.

Cheshire believes “nothing short of radical reform will improve housing affordability. But radical reform, like intelligently loosening restrictions on Greenbelt building, is frightening.” Affordable, more stable house prices should be the policy goals of all political parties. This requires a more liberalised system, whereby the demand for housing would impact its supply.

This generation of successful entrepreneurs may be able to live in London but their employees increasingly can’t. And crucially, for the wealth of this nation, the next generation of entrepreneurs may have already moved to a city where the cost of living isn’t prohibitively expensive – and my first pick wouldn’t be the UK.

The risk tolerant benefit more from entrepreneurship training

Policymaking always utilises a broad brush with which to redraw the lives of individuals. However, though broad, with the right evidence this brush can be narrowed by taking account of the heterogeneity of human behaviour. Just consider the many and varied schemes designed to support entrepreneurs. Putting aside the debate over whether or not this is the best use of tax revenues, nobody could deny that if we are to spend money on promoting entrepreneurs we should do so in most efficient way.

In “Entrepreneurship Training, Risk Aversion and Other Personality Traits: Evidence from a Random Experiment”, Robert W. Fairlie and William Holleran from the University of California draw on data from Growing America through Entrepreneurship (Project GATE), the largest randomised control experiment on providing entrepreneurship training ever conducted in the United States. Fairlie and Holleran find that:

[I]ndividuals who are more risk tolerant benefit more from entrepreneurship training than individuals who are less risk tolerant. The estimated interaction effects are large: averaging our estimates across the three waves implies that individuals who have a one standard deviation higher level of risk tolerance experience a 2.9 percentage point larger increase in business ownership and a 3.7 percentage point larger increase in the likelihood of starting a business from receiving the treatment than individuals with the lower level of risk tolerance.

This is a useful insight and suggests that we should consider identifying specific groups that may benefit more or less from government programmes to help people start a business. There can be no sure-fire way for spotting the next Zuckerberg, but we can increase the odds. Interestingly, Fairlie and Holleran also find “no evidence that individuals who are more innovative benefit more from entrepreneurship training than individuals who are less innovative.”

As the paper states: “some of the most disadvantaged groups such as at-risk youth and individuals with a criminal background have high levels of risk tolerance, and thus might benefit more for entrepreneurship training than more traditional job training programs.” There might be something in this: John Timpson has found ex-offenders fit in well with his unique entrepreneurial, bottom-up model for running his high street retailer.

As things stand in the UK, we have a remarkably limited understanding whether the schemes used to support entrepreneurship are doing any good. According to Gov.uk, business owners have 278 schemes to choose from. With proper analysis it might turn out that this is the correct number and they are being targeted at exactly the right group in the most efficient way. But I doubt it.

Philip Salter is director of The Entrepreneurs Network.

Politics: It's a funny old game

Is there anything more off-putting to people outside the Westminster Bubble than witnessing the carnival of party conference season? If you don’t support a party, you’ll be as perplexed as an ornithologist at the Manchester derby. Everywhere you turn, discussions rage about the latest transfer news with rumours of the latest Conservative MPs to migrate to Ukip, and tactics discussed in intricate detail about how to defeat the opposition. You'll even hear chanting: “Five more years!”

The football analogy can only be stretched so far though. While support for football clubs remains as popular as ever, people are becoming less interested in political parties – at least the top three:

“Membership of the three main political parties is at a historic low: less than 1% of the UK electorate is now a member of the Conservative, Labour or Liberal Democrat Party, compared to 3.8% in 1983. Latest estimates suggest that the Conservative Party claimed 134,000 members, the Labour Party 190,000 and the Liberal Democrat Party 44,000.”

And don’t expect this to change any time soon: Less than a third of young people express interest in politics, according to a recent ONS survey. It found that only 31% of 16 to 24-year-olds were fairly or very interested in the subject.

This decrease in interest in established parties and politics is offset by one trend though – a growing interest in small parties:

“[M]embership of smaller, often nationalist parties has risen markedly since the new millennium. In June 2014 membership of the UK Independence Party was around 39,000; in September 2014 membership of the Scottish National Party was around 64,000; in December 2013 membership of the Green Party was around 14,000. Though none of these parties can claim to equal either the Conservatives or Labour in size, their rise nonetheless represents a notable change in the make-up of the UK’s political landscape.”

There is plenty wrong with all major political parties, but there is a lot more wrong with these smaller parties. Ukip represents the worst of Little Englanders and the SNP the worst of Little Scotlanders. The Green Party has a more international outlook, but one in which the entire globe returns to a utopic state of nature; a time where our lives were very nasty, very brutish and all too short.”

In the long run, I don’t think this matters very much. In Britain, our lives – from money to morals – will increasingly become disconnected from political decisions. The next generation is more open to others doing what makes them happy, while Bitcoin and blockchain technology offers the prospect of capital accumulation and exchange without the state. This, in part, might be why so few young people care about politics. But whether or not tolerance and tech trumps politics, we have a few elections between now and then; elections where the result will greatly impact the wealth and happiness of us all.

So what can be done? You don’t necessarily need to rush out and join a political party, but I think we would benefit from smarter, more open-minded people in politics and the policy process. For example, we know immigration is a hot topic, but we should also know that removing all barriers to migration throughout the world is calculated to increase global GDP by between 67% and 147.3%. This isn't going to happen, but it should be the sort of data to inspire a generation. Perhaps not Steven Woolfe's generation though; Ukip’s spokesman on migration and financial affairs thinks we should cap net immigration at 50,000 per year.

It might not be rational or feel particularly empowering to vote but occasional elections aren’t the only way of engaging in politics and policy. For example, if you're a student on a gap year, you could apply to work for the Adam Smith Institute.

The game of politics isn’t always beautiful but the key players influence the result – even if they aren’t sitting in the House of Commons.

Philip Salter is director of The Entrepreneurs Network.