PUBLIC PROCUREMENT AND SMALL FIRMS

Across the European Union, small to medium sized enterprises (SMEs) account for 99 per cent of all businesses, make up two thirds of private sector jobs and are responsible for more than half of the value added that is created by the business sector.

However, one of the concerns of the sector, and its representatives, is that SMEs are still not getting full access to the EU public procurement market, which is estimated to be worth around one-sixth of total European GDP. Indeed, it is worth far more than any direct grant or government scheme that is aimed at supporting business.

The good news is that the European Commission recently published draft directives that are aimed at modernising public procurement in the EU. However, the bad news is that large firms, whilst capturing only 40 per cent of all public contracts, continue to get two thirds of the overall value of contracts across Europe.

And the smaller the business, the lower the chances of getting public contracts. In fact, SMEs only won 30 per cent of all contracts above 5 million euros and microbusinesses, which employ less than ten people and were recently a subject of a review by the Business Minister, only gained 6 per cent of the total market of contracts in terms of value.

This suggests that rather than issuing one large tender which seems to benefit larger companies, public authorities should promote the practice of breaking down tenders into smaller lots, which would increase the probability of SMEs becoming successful.

Hopefully, the debate over new possible procurement legislation will force the issue and start breaking down the cultural myopia within the public sector and the adherence, by many public servants, to the old adage that ‘No-one ever got fired for buying IBM”.

Another potential development that the European Commission could promote is the imposition of targets for spending public budgets with local small firms, as is the case in the USA where the Office of Government Contracting (GC) works to create an environment for maximum participation by small businesses in federal government contract awards.

With the US government spending billions of dollars in purchasing goods and services from private firms every year, targets have been set for every government department as to the proportion of expenditure that will go to SMEs. This is negotiated annually with every agency with an overall small business target for public procurement of 23 per cent.

 More importantly, legislation in the USA ensures that the public sector must conduct a variety of procurements that are reserved exclusively for SMEs. For example, the Small Business Reserve Programme requires state agencies to reserve 10 percent of their contracting dollars for bids solely by small businesses, which will then be able to bid for public contracts without competing with larger, more established firms.

And even if large firms are successful, there are rules which ensure that the winning businesses have to undertake ‘best effort’ to make use of small firms as subcontractors if an opportunity exists under the contract.

Whether such devices would work in getting government agencies in Europe to spend more money with local SMEs is open to debate but it is a debate that has to take place if the power of the public sector is to be used to benefit those small businesses that make up the vast majority of the economy. This is particularly the case in the UK where small firms have failed to get a fair chance to compete for the £236 billion per annum that is spent on public procurement. Even in Wales, where instruments such as “Community Benefits” requires public sector suppliers to map out how they will deliver benefits for the community they are working in, recent research showed that only 39 per cent of the contracts were spent on Welsh SMEs.

To date, it can be argued that there seems to be no coherent strategy on how to best utilise public funding to help grow the business sector and create jobs and wealth across local communities. However, with the Chancellor looking to set a budget for growth to get the UK out of its current economic doldrums, there is a golden opportunity to undertake a major reform of how the public sector spends its money, not only for best value and innovation to make public spending more efficient, but as an effective tool to support the economy.

SUPPORTING FEMALE ENTREPRENEURS

If you were asked to name any famous female entrepreneurs, who would you mention? Laura Ashley, Anita Roddick, Estee Lauder, Deborah Meaden?

Compare this to the long list of male entrepreneurs you could name at the same time. Yet, as the latest report from the Global Entrepreneurship Monitor (GEM) team shows, women are making a real impact on entrepreneurship across the World.

According to the latest data, more than 104 million women aged between 18-64 years old were actively engaged in starting and running new business ventures in 2010 in 59 countries. In addition, another 83 million women were running established businesses demonstrating the real impact they have on the development of enterprising economies across the World.

Despite this, the rate of entrepreneurial activity by men remains far higher. In fact, the study shows that women are less likely to consider entrepreneurship than men and when they do start a business, they are more likely to be motivated by necessity rather than an opportunity in the market-place.

Indeed, during the last eight years, the GEM study has shown that women’s perceptions about entrepreneurial opportunities have declined in most developed economies. Additionally, women are more likely to be discouraged from considering starting a business due to fear of failure and less likely to believe they have the skills to start and run a new venture.

As a result, it is not surprising that the growth expectations of women-run businesses are lower than for those run by men with twice as many men as women expected to add 20 or more employees to their companies.

Why is the case?

Much of the research in this area has tended to focus on gender differences in the access to, and use of, entrepreneurial finance, which is key to the birth and growth of new businesses. For example, studies have shown that female owned businesses tend to start with lower levels of overall capitalization than that used by male-owned firms. They also have lower ratios of debt finance and are less likely to use private equity or venture capital.

So are women turned off starting a new business because they have different perceptions to men, especially in terms of accessing finance?

That is the question that I have attempted to answer recently along with my colleagues Dr Caleb Kwong and Dr Piers Thompson from the University of Essex and Cardiff Metropolitan University respectively. Drawing on data from 49,107 individuals questioned as part of the Global Entrepreneurship Monitor (GEM) adult population survey undertaken in the UK, the research examined “Differences in perceptions of access to finance between potential male and female entrepreneurs”.

Not surprisingly given previous studies, the results from the study confirmed that women are more likely to perceive that they are financially constrained than their male counterparts. Additionally, the research found that gender plays an influential role in preventing potential female entrepreneurs from starting a new business when no other barriers exist. In fact, the models developed found that women are around 10 percent more likely than men to perceive finance to be the only barrier to entrepreneurship. Those are the findings but what are the implications for policymakers?

Certainly, the analysis suggests that there is a role for support bodies to develop specific mechanisms to deal with this issue. For example, the availability of start-up finance from various sources could be marketed by different support organisations to encourage women to attempt to obtain the necessary finance rather than being discouraged at the first hurdle. This includes the need to increase both financial awareness and literacy so that potential female entrepreneurs are aware of all financial options open to them as well as increasing their ability to utilise those funding sources they have knowledge of. These should not only emerge from public bodies and women's stakeholders groups, but also from the private sector and community-based organisations, such as credit unions, which have greater outreach abilities.

The study also found a stronger effect from education in reducing these perceptions of financial constraints for women. This implies that female graduates could provide a source of potential entrepreneurs who are less likely to perceive obtaining finance to be a problem and are more positively positioned to be capable of acquiring external funding. Given this, there is no reason as to why higher education institutions could not play a vital role in supporting the development of female entrepreneurs.

For example, Welsh universities could increase the level of female entrepreneurial activity by advertising the benefits and potential of entrepreneurship as a career. This could be undertaken through cross faculty entrepreneurship education programmes which address the needs of all the student population rather than just business students. More importantly, they could provide enterprise initiatives that are specifically targeted towards the specific needs of potential female entrepreneurs within the student population.

Recent research has shown us that new firms create almost all new net jobs in the economy and yet women are, as this study suggests, facing specific barriers which may disincentives them from taking part in entrepreneurial activity. Certainly, if we can get more women to consider establishing a new venture, then it can only benefit the Welsh economy at a time when we need every job we can get.

THE HEART OF ENTREPRENEURSHIP - WANTING TO MAKE SOMETHING HAPPEN

The latest sketchbook from the Kauffman Foundation. Enjoy....

RETURN TO THE VALLEY

Last summer, the University of Wales Global Academy established an office in Silicon Valley, California, the global centre for innovative and entrepreneurial businesses.

Based at the Irish Innovation Centre (IIC) in San Jose, the self-proclaimed capital of Silicon Valley, the aim of the office is to provide a presence for Welsh businesses that felt ready to present their innovation technology to potential investors, taking advantage of the soft-landing that the IIC provides to companies already based there.

As most of you are no doubt aware, Silicon Valley is where some of the leading high technology businesses in the World are to be found, with great companies such as Apple, Cisco, eBay, Google, Hewlett Packard, Intel and Yahoo having their corporate headquarters located there.

And of course, let’s not forget that it is also the home of Facebook, a company that was started in a bedroom eight years ago but which, in the next few months, will undertake a stock market flotation that is estimated to value the company at $100bn (£65bn), making billionaires of its founders and backers, including Mark Zuckerberg, who is still only 27 years of age.

However, the region has faced some challenges over the last few years and like every other part of the USA, even the Silicon Valley economy was not immune to the severest recession since the 1920s. But similar to the aftermath of the dot.com bubble burst a decade ago, it is mounting yet another remarkable comeback. In fact, according to a recent review of the region, more than 42,000 new jobs were created in 2011, which represented an increase of 3.8 per cent as compared to the US average of 1.1 per cent.

Innovation has also begun to fire again, with patent registrations increasing by 30 per cent in twelve months. And venture capital investment increased by 17 per cent with a specific focus on biotechnology and medical devices. In 2011, around a third of venture capital invested nationwide - £5bn - went to Silicon Valley companies.

These are some of the reasons why I am passionate about getting companies from Wales to visit. Even by having a small Welsh presence in the region, there is the potential to make a difference, especially as we have been building up our links through specifically working with the Irish Technology Leadership Group (ITLG) that manages the Innovation Centre.

Established in 2007, the ITLG is a non‐profit group of senior Irish executives from around the world, including some of Silicon Valley's leading corporations, each of whom is committed to promoting the technology connection with major markets in the USA.

By recognising us as fellow Celts who want to work alongside our Irish cousins to develop our respective economies, the ITLG has given us a platform to potentially connect entrepreneurs, technology companies, academics, students and government officials to Silicon Valley.

Over the next few years, we aim to work with the ITLG to make the most of this opportunity through trade missions, networking events, executive introductions and strategic business planning meetings.
The first real opportunity to do this will take place next month, when we lead an innovation mission to San Jose. We are only intending to take a small group this time as a precursor to a more extensive visit later this year but if you would like to come along then please get in touch and I am sure we can fit you in.

The main attraction of this visit will be the annual ITLG innovation summit. Thisis a two-day gathering which presents attendees with an inside look at the cutting-edge technology, business and political trends that are creating the most exciting and profitable new opportunities in the world. It will give those who attend the chance to meet venture capitalists, discuss their products and services with other entrepreneurs and technologists and, most importantly, network with other innovative individuals. The organisers are also hoping to have Cardiff-born Michael Moritz, one of the most successful venture capitalists of his generation, attend the event.

The major sponsor of the summit is the venture capital house Andreessen Horowitz, a company set up by Netscape founder Marc Andreessen with the aim of investing in new starts ups. Only last month, it raised a billion pounds for a new fund that will not only be investing in software companies but also in industries such as healthcare and education.  Imagine what a boost it would be for our economy if such a world renowned company would consider investing in a business from Wales.

As Sir Terry Matthews, the Newport-born serial high-tech entrepreneur, said last year when the Global Academy announced the decision to have a presence in California, "San Jose and the remainder of Silicon Valley continue as a major concentration of high technology companies and venture capitalists. The new Welsh Innovation Office will be a significant benefit to any new company looking to enter the market for sales opportunities or access to sources of capital.”

No one could disagree with such a statement but it will only be a success if Welsh companies make the effort to come across and show the investors in Silicon Valley that our products and technologies are as good as any in the World.

I look forward to seeing you there in the future.