Why do Policymakers Need a Panel Study of Entrepreneurial Dynamics (PSED) in the West Midlands?

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Meng Song and Mark Hart discuss the need to examine the demographic characteristics and motivation of entrepreneurs to increase our understanding of people who create new businesses and to track them throughout their start-up journey to improve our support for them. 

This blog highlights the work of a new project “Lifting the Lid on Enterprise Diversity & Growth in the West Midlands“, which will collect and analyse panel data on business creation of ethnic minorities in the West Midlands to add to the Global Entrepreneurship Monitor (GEM) dataset. This will generate data to support evidence-based policymaking on minority enterprise and inclusive.

This project is being run in partnership with the Enterprise Research Centre and Centre for Research, the Centre for Research in Ethnic Minority Entrepreneurship, Aston University and the West Midlands Regional Economic Development Institute.

Since the 1970s substantial evidence has accumulated that new, not necessarily small, firms are a major course of job creation, productivity improvements, economic and product innovation, as well as major career options for many, particularly immigrants, minorities, and those from disadvantaged backgrounds.  Not surprisingly, therefore, national, regional, and local governments all over the world have developed programmes to facilitate the development of new firms.  However, the evidence of their success is, at best, mixed.  The lack of systematic, representative descriptions of the firm creation process has been put forward as the major cause of this evidence gap.

What we know from recent research by the Enterprise Research Centre (ERC) is that when we look at cohorts of start-ups in the UK there is an extraordinary force of mortality (Anyadike-Danes and Hart, 2018).  After 15 years 90 per cent are dead, and for those surviving, the chance of death is still about 10 per cent a year.  Another important finding is that most firms, even those that survive 15 years, do not grow very much.  Further, of the firms that do grow firms born smaller (i.e., 1-4 employees) grow faster than those born larger.  These findings are consistent across a range of start-up cohorts and may be described as ‘stylised facts’ about firm creation.  This research has been possible due to the availability of firm-level microdata in the UK based on annual abstracts of the Inter-Departmental Business Register (IDBR) which enable researchers to construct longitudinal panels of firms over time.

What is missing from these stylised facts is any understanding of who these entrepreneurs are in terms of their demographic characteristics and motivations as well as the challenges they face as they seek traction in their chosen market.  In other words, there is a clear need for a longitudinal panel study of nascent entrepreneurs to understand the reasons for the high mortality rate and why so few of them grow beyond their start-up size.  The development of a Global Entrepreneurship Monitor (GEM) Panel Study of Entrepreneurial Dynamics (PSED) for the West Midlands will create such a panel and provide new information about the nature of the firm creation process for a range of demographic groups including ethnic minority communities.  Identifying those entering the start-up process and tracking their efforts and outcomes over time will provide new information about the nature of the firm creation process.  The PSED will help examine the mechanism of the business creation process in the UK. Questions such as how entrepreneurs identify a need in the market to provide value for customers, how resources such as physical equipment, human capital, finance sources are identified and combined, how business partners such as various suppliers and consumers are linked to generate revenue, and where new businesses tend to need help the most all seem unclear. Much of this will have direct relevance for the development of effective policies and programmes at the national and regional levels.

We already know from a pre-test of the PSED in the UK is that the creation of a panel of nascent entrepreneurs can yield important information of great relevance to policymakers (Reynolds et al., 2014).  For example, we established that:

  1. there is a large amount of start-up activity, requiring effort and funds, which preceded the initial entry into the main administrative registries such as HMRC and VAT.
  2. women form a substantial minority of start-up activity and that ethnic groups are a small proportion of the total.
  3. half of those in the start-up process were not aware of any programme that might assist their new venture
  4. personal savings are the most important source of finance for nascent entrepreneurs
  5. those who do ‘disengage’ do so for personal reasons, problems in attracting customers, complications in getting the business organised, as well as the inability to secure financial support

We have already engaged in a follow-up survey to the GEM 2020 Adult Population Survey (APS) and tried to identify a cohort of nascent entrepreneurs to track over time, but this proved extremely difficult due to the obvious constraint of undertaking interviews during a pandemic when many fledgling business owners had more important priorities than engaging with academic researchers.  However, we have now got access to respondents from the 2021 GEM APS who have agreed to participate in further research, and we are currently in the process of re-contacting them inviting them to join a panel of nascent entrepreneurs.  The results of this research will be published and disseminated later in 2022 and will provide invaluable information for those engaged in designing an inclusive business support ecosystem for the West Midlands.

References

Anyadike-Danes, M and Hart, M (2018) “All grown up? The fate after 15 years of a quarter of million UK firms born in 1998”, Journal of Evolutionary Economics, 28, 45-76.

Reynolds, PD; Hart, M and Mickiewicz, T (2014) The UK Business Creation Process: the 2013 Panel Study of Entrepreneurial Dynamics Pretest.


This blog was written by Dr Meng Song, Aston University and Professor Mark Hart, Deputy Director of the ERC and Professor of Small Business and Entrepreneurship at Aston Business School.

Disclaimer: 
The views expressed in this analysis post are those of the authors and not necessarily those of City-REDI / WMREDI or the University of Birmingham.

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