High growth firms in Scotland

This research report examines high growth firms (HGFs) in Scotland in order to provide Scottish Enterprise (SE) with a better understanding of the market size of high growth entrepreneurship. A further aim of the research was to gain a deeper understanding of HGF dynamics by exploring their origins, activities and strategies. For the purpose of this research, HGFs are defined as enterprises with average annualised growth in employees or turnover greater than 20 percent per annum, over a three year period, and with more than 10 employees in the beginning of the observation period.

The methodology adopted for this research was a multi-method approach involving both quantitative and qualitative elements. There were four main elements to the study, including: a literature review, aggregate data analysis, secondary information analysis and interviews with HGFs and SE business account managers.

The study found, firstly, that HGFs comprise a small proportion (4.1%) of the overall business stock in Scotland employing more than 10 employees, which is broadly in line with other smaller European economies, although it is not possible to say exactly how this compares with other parts of the UK or other countries. It is suggested however that the small size of this cohort of businesses should not detract from the fact that they undoubtedly make a disproportionate contribution to economic development and are critical to Scottish economic growth. Secondly, the growth of these firms is not a uniform or linear process. Rather, growth tends to be sporadic and uneven and is often achieved through acquisition. Indeed, many of the HGFs identified would no longer be classified as being high growth if this analysis had been taken a year later. The population of HGFs is constantly changing: as some emerge others will stop growing and others will cease to exist. Therefore, disequilibria and flux is the norm for these firms. Third, HGFs are a diverse and heterogeneous collection of organisations. They are found in different sectors, have different sizes, ownership structures, country of origin and different age groups. This makes it inherently difficult to pre-judge where HGFs will emerge from. Notwithstanding this, it is found that Scottish HGFs tend to be older and larger than the archetypal HGF and a large proportion have been pre-incubated in existing businesses. Finally, one of the most notable features of HGFs was their very strong customer focus and innovative behaviour. Although many of these firms are in traditional rather than high tech industries, almost all were extremely innovative. They have a strong engagement with customers and end-users to help co-create new knowledge. Due to this, HGFs were able to undertake innovative business models which often entail recurring and multiple income streams which are extremely effective for enabling business growth.

A number of recommendations for policy makers are made. It is suggested that it is vital policy makers ensure that enterprise promotion activities encourage the formation of new businesses with high growth potential. They must however keep eligibility rules for support as flexible as possible as potential HGFs can be found in various sectors and are not confined to any particular form of business ownership. Thus there is a need for mechanisms to support the different models of potential HGFs. There may also be a case for shifting support from technology (with its emphasis on R&D expenditures) to innovation support focusing on closer end-user engagement. With regard to foreign acquisitions, there is arguably a need for more pro-active policies towards mitigating the negative consequences in some economies. One suggestion is to extend inward investment aftercare policies undertaken by regional development agencies, to indigenous firms which are acquired by foreign-owned companies.