High-growth firms transient; not typically in high-tech sector
High-growth firms (HGFs) are not typically high-tech firms, just as the word 'startup' may not refer to a new tech company despite the common misusage in the lexicons of politics, business and journalism. Policy makers also need to be aware that rapid growth of HGFs is typically not sustained.
Today the uses of for example digital technologies are diverse within high-growth firms while technology may be the output of a firm or one of the tools to deliver goods or services to customers — for example DHL the international courier and air freight service takes advantage of technology developed by others as does Uber in providing a transportation service or Airbnb, which operates in the accommodation business. Then there is Amazon which began with the tagline 'Earth's biggest bookstore,' but now is likely to become the world's biggest tech company while it already is one of the world's top corporate spenders on research and development.
David Birch an economist at the Massachusetts Institute of Technology (MIT), from the late 1970s published research on the importance of a small percentage of young firms (up to 5 years old) that experienced rapid growth giving them a key role in job creation. Birch used the term gazelles for high-growth enterprises that had been employers for a period of up to five years.
HGFs can be young or old and the majority of new business firms exit or fail within the first ten years — in the US the overall 10-year survival rate is about 33% and in high-tech less than 10% — while the median (typical) surviving young business does not create jobs but remains small.
High-growth enterprises are firms with average annualised growth in the number of employees greater than 20% per year, over a 3-year period, and with 10 or more employees at birth according to the Organisation for Economic Cooperation and Development (Eurostat-OECD Manual on Business Demography Statistics, 2008). However, in the European Union, the Commission set the definition of high-growth enterprises as follows: all enterprises with at least 10 employees in the beginning of their growth and having average annualised growth in number of employees greater than 10% per annum, over a 3-year period.
Another metric is usually used in the US, which we explain in below.
High-growth firms according to the OECD typically account for between 2% and 6% of enterprises in most countries. While few in number, fast-growing firms generate employment for a considerable number of persons.
High-growth enterprises are found in all economic sectors, although the share of high-growth enterprises can vary substantially between sectors. There is no consistent pattern across countries as to which sectors host the largest shares of high-growth enterprises. Across economic activities, relatively large shares of high-growth enterprises are found in scientific research and development as well as in computer programming and consultancy.
Countries with a comparatively large share of high-growth enterprises in one activity tend to have a large share of high-growth enterprises in other activities as well. Countries that stand out with regard to high shares of high-growth enterprises include Latvia, the Slovak Republic and Bulgaria.
In recent times research on HGFs has grown but data shortcomings remain, and since the outbreak of the Great Recession several governments have looked to high-growth tech firms to create jobs engines.
In the UK the authors of a 2014 paper published by NESTA, an innovation foundation, wrote that "only around 15% of HGFs are operating in high-tech sectors. This figure is slightly higher for the South East of England at just over 20%, but for most other regions the prevalence of high-tech HGFs is between 12 and 16%."
In the US 2015 research by the Kauffman Foundation, the leading US entrepreneurship think tank, was based on INC. magazine's Inc. 500|5000 list of fastest growing companies in America — companies are ranked according to the percentage growth of their annual revenue over a 3-year period from a base of at least $2m. Annual growth averaged 39%.
Kauffman research found that of 479+ US companies among the Inc. 500|5000 2014 list, the vast majority of them were not based in Silicon Valley, and less than 6.5% of them raised any venture capital.
US high-tech accounted for 26% of firms — 19.4% for IT and 6.5% for Health and Drugs.
Eurostat reported in October 2016 that almost one in 10 enterprises in the EU28 in 2014 were HGFs, using the definition of annualised growth of 10% over 3 years compared with the OECD's 20%.
The highest ratio in the EU was found in the “Information and communication“ sector (15.0% of active enterprises in this sector), followed by “Administrative and support service activities” (12.7%), "Transportation and storage" and "Professional, scientific and technical activities" (both 11.0%).
Ireland's overall rate of 12.3% was at the same level as Sweden's and the rate of HGFs accounted for by Information and communication in Ireland was at 19.9%; the United Kingdom 18.6%; Sweden (18.2%) and the Netherlands 17.6%.
Information and communication is usually called ICT (Information and communications technology) and the sector in Ireland is dominated by units of giant US tech firms: Apple, Google, Microsoft, Facebook, Oracle etc. and in the 3 years to end 2014, employment grew by 7.5% compared with overall jobs growth of 5% according to the Central Statistics Office (CSO) — no reason to use superlatives here on employment growth!
ICT employment, including sales and administration staff which comprise about half the total, accounted for 4.3% of the workforce of 2.04m in December 2014.
The CSO has published no data on HGFs and Ireland provided very little data for the OECD's Entrepreneurship at a Glance 2016 report, which was published in September 2016.
Eurostat said in its report:
Administrative and support service activities were among the top 3 sectors in terms of high-growth enterprises in 20 Member States, with the largest proportions being registered notably in Ireland (19.3%), Sweden (16.7%), Belgium (16.3%), Croatia (15.5%) and Denmark (15.3%)
Here again even though Ireland had 19.3% of its HGFs in this category, the growth in employment overall from end 2011 to end 2014 was just 300 people — 65,300 to 65,600.
HGF growth seldom persistent
McKinsey, the US consultancy, said in 2010: "While many policy makers see innovative technologies as the answer to the challenge of job creation, our analysis indicates that governments are likely to be disappointed in such hopes.”
In more recent research McKinsey analyzed the life cycles of about 3,000 software and online-services companies from around the globe between 1980 and 2012.
It found that high-growth companies offer a return to shareholders 5 times greater than medium-growth companies but sustaining growth is really hard.
Companies have only a small probability of making it big. Just 28% of the software and Internet-services companies in our database reached $100m in revenue, and 3% reached $1 billion. Of the approximately 3,000 companies we analyzed, only 17 achieved $4bn in revenue as independent companies. Moreover, success is fleeting. Approximately 85% of supergrowers were unable to maintain their growth rates, and once lost, less than a quarter were able to recapture them.
Ross Brown, Colin Mason and Suzanne Mawson in the NESTA paper, highlight other myths besides the commonly held one that high-tech HGFs are the sole engines of growth.
Research in the US found that HGFs are on average 25 years old, with even small firms (1-19 employees) exhibiting a more advanced average age of 17 years. In the UK 70% of HGFs are at least 5 years old, as well as for regions such as Scotland, where HGFs are also on average about 20-25 years old;
Evidence strongly indicates that very few university spinouts grow and the vast majority remain very small;
Evidence indicates that only a small minority of HGFs are backed by venture capital;
Research has demonstrated that, instead of transitioning through relatively orderly growth stages, rapid growth is erratic, unpredictable, sporadic and often of limited duration;
Much of the current work to date exploring HGFs has tended to focus on organic growth but growth through acquisition should not be considered to be an activity undertaken only by ‘big’ firms.
High-growth results from a mix of factors and the innovation applied in many of the firms may not depend on formal research and development but on issues such as investment in human capital, management style and industry experience.
A British government paper distinguishes between innovation which contributes to economic growth through a long run process and is dependent on persistent investment in innovative capabilities while firm growth is a short run phenomenon in which firms move in and out of growth in an erratic way...Employment growth more generally starts the processes that drive
growth, with investments in new employees preceding increased investment in innovation, the generation of sales from new products and services, and finally increases in overall turnover. Importantly, we do not find evidence for a feedback loop that would start this process again, which explains why growth is episodic, rather than persistent in the UK."
Belgian research in respect of HGFs in the period 2000-2009 found that more than half of the firms that were identified as a high-growth firm in the period could only maintain this status for one of the seven analyzed three-year periods while only a very limited number of firms were able to be qualified as a HGF in at least four of the 7 periods.
Most HGFs are small but a small number of large companies employing more than 500 may account for half the total impact of HGFs according to a US Small Business Administration paper.
In recent times the attention of the European Commission has been on high-growth innovative firms (HGIEs) and a June 2016 report from an innovation adviser of the president noted that "there is limited statistical data on HGIEs and there is a shortage of evaluation studies."
A report on a forum on HGIEs that was held in the Commission's Berlaymont building in Brussels in 2014 noted that "HGIEs are not prevailing in high-tech sectors. Whilst many high-growth firms have been found to be highly innovative, they do not necessarily have extensive R&D activity, nor do they typically seek to protect any intellectual property."
It also noted: "HGIEs are very seldom new or very young businesses. This questions the rationale behind the high-growth support measures, which focus on startups. While some academics argue that encouraging startups in general is lousy public policy, increasing the volume of startups may be an effective way of generating more high-growth companies."
The dilemma for policy makers is reflected in the quote, "I know half of my advertising budget is wasted — I just don't know which half" — which is attributed to Lord Leverhulme, an English soapmaker or John Wanamaker, an American retail magnate.
We have noted above that the OECD and the European Commission have significantly different thresholds for the definition of a HGF, which is confusing.
A study of the Scania region of Sweden found no associations between innovation activities and continued firm-growth. It also found that "sustainable high-growth firms are more often involved in activities aimed at developing and improving existing production processes, and are also less committed to international operations in new foreign markets."
Ireland should at least consider using longitudinal studies to track firms that are publicly supported over several years to identify the factors in successes and failures.