We have got used to recognising the role of innovation in generating growth and prosperity in all economies. At first, society heaped praise on individuals who led technological change (for example, Trevithick, Armstrong or Brunel). In the last 100 years, greater emphasis was given to larger firms and government policy to lead the “white heat of the technological revolution”, notably in the UK under the Labour governments of the 1960s and 1970s. More recently, we have moved back to recognise the role of the individual again, perhaps not so much through the heroic sole inventor but more about the contribution of innovation from SMEs, rather than just the efforts of large corporate firms and government. Our Aston colleagues who are part of the Enterprise Research Centre (ERC) have made a leading contribution to redressing the balance through a number of linked research projects, most recently looking at the role of City Regions in promoting innovation in smaller firms.
This “back to the future” pattern of thinking on innovation has a number of implications, notably for policy. We have historical monographs about great inventors recording their personal experiences and upbringing. However, when the key driving force on innovation shifts to government and large firms the role of the individual and their environment is lost somewhat, being replaced by issues regarding government spending and the ability of corporate managers to support and fund innovation. Moving back to a more direct role for individuals and SMEs runs the risk of overlooking the personal and societal factors that may be a key part of supporting innovation.
In one of our recent projects at CREME – working in partnership with Aston based colleagues from the ERC and supported by the Federation of Small Business –we have published useful findings to enhance our knowledge of the UK’s innovation engine with special regard to SMEs. In particular, we have looked at the role of ethnic minority business owners. More directly, are SMEs owned and led by a person from an ethnic minority more or less likely than other businesses to be involved in various types of innovation?
The data was sourced from the UK Longitudinal Small Business Survey (LSBS) for both 2015 and 2018. This is a large telephone based survey commissioned by the UK government. The choice of the two specific years was made as each had a sample boost to enable the analysis of ethnic origin in more detail. We were also able to look at a snapshot of events either side of the 2016 Brexit referendum.
The results were very clear. Ethnic minority-led firms engage in both process and product/service innovation on average more often than non-EMBs. In 2018, 21 per cent of EMBs reported the introduction of process innovation in the past twelve months and 30 per cent reported product or service innovation (compared to 15% and 19% of non-EMB respectively). Moreover, the stronger results from EMBs compared with non-EMBs regarding innovation occurred in the 2015 results as well. Also, the outperformance was evident across each of the main ethnic groups, often by a noticeable margin. For example, in 2018 the percentage of white –led firms introducing process innovation (15%) was lower than Asian-led (19%), Black-led (24%) with other ethnic and mixed heritage groups somewhere in-between (22%).
The enhanced contribution of EMB-led firms in the profile of the UKs innovation activity is yet a further indication of the wider importance of ethnic-led firms to the UK economy, valued at around £25 billion in 2018. However, this also highlights a problem. The number of businesses reporting either process or product innovation decreased between 2015 and 2018 (although in each year, EMB-led firms still reported more activity than non-EMB firms). This was highly likely to be driven by the period of political and economic uncertainty immediately after the 2016 referendum. This decline between 2015 and 2018 was particularly evident (from 27% to 21%) amongst EMBs engaged in process innovation – where earlier ERC led research has shown a strong link with future productivity growth. While things may have stabilised in 2019, the COVID-19 led UK recession has probably to a further decline in recent months that could last for many months or even years.
Any loss of momentum amongst EMB-led firms’ innovation plans will have a disproportionate impact on the UK economy’s growth and productivity record; quite reasonably, the UK government may think it highly appropriate to take steps to stop this happening. This would probably require some form of targeted intervention beyond ‘top down’ macroeconomic and tax policies. The track record of national programmes especially of this type is very chequered but some evidence points to more success for more locally-based efforts (with the current Growth Hubs approach appearing to be doing quite well overall, albeit it is still early days).
However, any such activity requires good customer targeting and business engagement. Our research clearly shows the benefits of targeting EMB-led firms in a bid to boost innovation. Even so, engagement may be the bigger problem. Elsewhere in the same research report we confirm a finding from several previous CREME and ERC projects pointing out that ethnic minority firms are less likely than other businesses – every else being equal – to engage in formal advice and networking (such as trade associations, chambers of commerce or business clubs), with a greater emphasis on informal advice, family and friends and word of mouth.
So, with the diversity and inclusion rising up the political and economic agenda, along with the clear productivity and growth benefits of ensuring ethnic-led firms maximise their innovation potential as we recover from COVID-19, policy makers would be well advised to re-visit the engagement and outreach strategy for this market segment. Successful examples of high quality engagement with ethnic firms can be found if you know where to look. We need to identify best practice and practitioners before we invest too heavily in the wrong way (again).
(Author: Professor Richard Roberts, Centre for Research in Ethnic Minority Entrepeneurship)