The Innovation Ecosystem: Why SMEs must be at the heart of local approaches to economic development

SMEs are a hugely important part of the socio-economic fabric of the United Kingdom. In an uncertain world, our Director, Chris Baker, shares his thoughts on why national, regional and local governments must ensure these organisations and prioritised and supported to thrive. To read more in this series, read here.

2024 has been a year full of uncertainty. Major electoral mobilisations, not least in the USA, UK, India, Indonesia and South Africa, coupled with regional conflicts threatening to escalate, the global climate crisis, and the impact of inflation on both business and personal finances, has created an environment of speculation and concern.

In the UK, a new government has, amongst other things, committed to further devolution deals across England, with a number of advanced conversations aligning to this May’s regional Mayoral elections. There is an appetite across stakeholders for powers and investment to be transferred ‘closer to home’, and a wealth of potential opportunities lies ahead.

In parallel, Local Authorities have been under immense pressure, with services likely to be cut across locations due to financial shortfalls. Birmingham Council’s current plight is testament to the shortage of core funding, alongside the impact of risky decision making and policies that haven’t paid off. 

All of this means that uncertainty and change in the UK ranges across a National, Regional and Local picture - and this makes it an extremely difficult landscape in which to do business. As the country continues to feel the effects of Brexit, labour shortages and cost increases, it’s no surprise that there are many organisations, entrepreneurs and ambitious individuals who are concerned about the future.

As part of their electoral manifesto, Labour promised to promote and enable economic growth, as a key to unlocking prosperity. Although there were scant policy details at the time of the campaign, the message was around the empowerment of UK businesses to deliver new, innovative ideas, and scale up existing successes - in turn, creating good jobs across the country and increasing tax yields that could be reinvested into public services.

In light of this, October 2024’s budget - the first attempt of the new government to set a course for economic revitalisation - has unsurprisingly been an object of key focus for many. However, amongst the headlines of a raft of business tax increases, fiscal rule changes, and capital investments, there’s a crucial aspect of the country’s economic system that’s largely going ignored.

It is the Small and Medium-sized Enterprises (SMEs) of the UK who provide a significant chunk of the economic life blood of the country, especially so in terms of local economics. SMEs account for 60% of jobs and around half of turnover in the UK’s private sector, employing over 16.7million people at the start of 2023. The role a cluster of medium sized hi-tech businesses play in a town like Paignton in Torbay, for example, is vital. Organisations operating in semi-urban and rural areas, or post-industrial towns, are the 21st century’s answer to the mines and factories of a previous era (not on the same scale as an individual organisation, but as a cluster) - good, local jobs that enable ancillary sectors to thrive. More than that - these are real hard-working people striving to bring good job opportunities, services and products to their ecosystems. 

Innovation funding and investment has always been focused on high-tech start-ups, high growth technology companies, and sectors where the business case is either easy to understand, or well hyped. Whilst there is solid reasoning for this - economic as well as political - this bypasses thousands of excellent, well run and high-potential businesses that exist outside of this narrow frame, who don’t have the myriad of connections and amplifiers that come with spinning out of a large organisation, or having the high-net-worth backing to kick-start fundraising. Compounding this, ROI rates for local funding tend to favour already established innovation ecosystems, those areas experiencing high growth - this means areas such as London look like a more attractive investment proposition, thereby creating a vicious circle for more other regions.

As noted in a recent Onward report on the state of Britain’s entrepreneurial environment, ‘high street bakeries and AI tech start-ups, for example, need very different forms of support to grow.’ This means different forms of finance, working on new, innovative vehicles (e.g. CDFIs) that can provide more SMEs with genuine funding support, that they perhaps aren’t in a position to access via equity funding or VC networks. But it also means more targeted support and advice - something we at Studio Zao have seen first hand, particularly in the last 3 years.

“Now, more than ever, SMEs deserve the ability to access support, advice, and financing.”

The previous government’s ‘Levelling Up’ approach via the UK Shared Prosperity Fund (UKSPF) - the direct and significantly reduced successor to the ERDF - was, amongst other things, an attempt to provide this support to small and medium sized enterprises (SMEs) at grassroots level (with mixed outcomes so far). It has been the main source of local funding and support for SMEs for the last 2 years. 

As we saw in October’s budget, the UKSPF will be extended to cover this vital support and investment - but at a significantly reduced scale (down from £1.5bn to £900m across the next two years). This funding gap in public investment in SMEs and local businesses will need to be worked through at a local and regional level - and used more productively than ever - in order to ensure that windows of opportunity aren’t closed to entrepreneurs and organisations, especially those not in the tech start up space.

We’re talking about the creatives, local service offerings, and key elements of global supply chains, on which we all depend, and which make life and communities enjoyable and uplifting.

Now, more than ever, they deserve the ability to access support, advice, and financing. 

If these organisations can be encouraged, empowered and supported to develop innovative capabilities, launch new products and services, and do so commercially and sustainably, then the UK will unlock a grassroots tidal wave of growth, from the bottom upwards. This is what a real ‘Entrepreneurial Ecosystem’ will look like - and what it can deliver.

How the new government takes the reins to generate a more productive ecosystem for these businesses is crucial for the economic and social prosperity of the country - jobs, GVA, social impact and, indeed, their prospects of securing a second term. It’s likely the below areas will be key focuses in the short and mid-terms:

• Devolution - a major push towards devolution and decentralisation, putting more powers (and responsibilities) into the hands of local authorities, partners and communities, to stimulate connections and opportunities on the ground, and remove blockers to growth (e.g. Transport, Energy and Infrastructure. This may also require local fundraising done locally - changing the picture on community wealth building and investment mechanisms);

• Small business support and access to finance - these will need to go hand in hand, as well as raising of awareness amongst less familiar groups, to ensure inclusivity and to maximise productivity. This will also require not only local funding but Inward Investment, including international partnerships and offerings;

• Incentives for Growth - SMEs will need to feel like growth is a 'good thing', not something that lines them up for increased work, higher taxes and reduced flexibility. National (and local) policy will need to reflect this in business friendly terms, whilst ensuring that workers are protected and businesses of all kinds contribute a fair share towards public services;

• Collaboration and Sector focuses - investments in clusters and industries where the local area has genuine leverage, building reputation, innovation and a talent pipeline.

At Studio Zao, we’ve worked with 200+ SMEs and Start-ups, just as many budding entrepreneurs, and a roster of larger organisations and sector bodies. We know the challenges these organisations face, what they need to break barriers and take the next step, and how this can be done. Innovation, so long the prerogative of big corporations, academia and tech, is vital to unlocking the latent potential within Britain's small businesses - launching new ideas, growing offerings, creating good, local jobs and building capability and skills in the community.

In a series of articles, we’ll be sharing some of our learnings, and hearing from businesses and enablers that we’ve partnered with, from Brixton to Brixham, and how practically fostering Innovation can be a major tool in the government’s arsenal for achieving their economic goals and delivering a pathway to prosperity on these shores.

In the meantime, check out some of the work we’ve been doing through our IMPACT Programmes, in Torbay and Croydon.

Have any thoughts or questions?