Growing Local Businesses – How?

Business Transplants versus Home Grown?

Business diversification is seen as a method to reduce the dependency on ‘commodities’ in regional areas. While this is easy to say, it has proved difficult to do.

Our region has a competitive advantage in natural-resource based industries, and a distinct disadvantage in knowledge and technology based businesses, due largely to remoteness, lack of connectivity with similar businesses, and lack of business support services.

Government policy in the regional development space appears to be chasing the diversification objective with a heavy emphasis on a ‘silver bullet solution’ from outside the region. This is certainly the flavour of projects aimed at offsetting the loss of productive water under the Murray Darling Basin Plan.

Would we have more success by looking inside the region at what is already here, rather than putting most effort into ‘hunting for big game’ elsewhere?
 

Small-Medium High Growth Business is Where the Jobs Are

Regional areas in the U.S. went down the business transplant (business attraction, smoke-stack chasing) path decades ago and found it wanting. They have now turned their attention to growing what they already have.

Small local businesses are the engine for job growth, not large capital-city based corporates. In the U.S. city of Portland, between 1999 and 2009, small local companies grew by 63.6% while non-resident companies with their headquarters elsewhere declined by 8.9%. Small Portland businesses with less than 10 employees added a total of 113,360 jobs¹ . Figure 1 illustrates this trend for the entire U.S.
 

Similarly, in 1989 the City of Littleton Colorado commenced a local business growth and entrepreneurship program which has resulted in a 71% increase in employment.

The task in the U.S. is easier than here, due to the large number of small firms which regional development practitioners can work with, and high levels of government funding support for business growth programs. Never-the-less, the U.S. experience gives us some solid clues about where we should be directing our efforts in the Northern Inland region.

There is another element however. It is not just about business size, but also about businesses with the potential for rapid growth. A recent study in the UK found that only 6% of firms were in the ‘high growth’ category, but that they generated 54% of the new jobs (NESTA 2009²).
 

How Do You Grow Local Businesses?

The first thing regional development organisations (and perhaps governments) have to acknowledge is that they will need to pick winners. Governments shy away from ‘picking winners’ as they fear it will be viewed as an unfair use of public funds. However, if we want to avoid a lot of wheel spinning and wasted dollars, a reality check is required. The cold hard truth is that not all businesses are destined to become high growth businesses, for a number of reasons including:

• The circumstances of the business owner. Many simply do not want to expand their businesses due to a myriad of factors and are quite content where they are;
• The personality of the business owner. Some are not cut out for business expansion;
• The market they operate in and their products may have limited scope;
• Logistical barriers (e.g. lack of access to transport – something RDANI is acutely aware of as a hurdle in our region, and we are pursuing projects to address this);
• Their financial situation may preclude expansion, though interestingly business skills are often a bigger hurdle than access to capital.
   

To make rapid progress and get bang for our buck, we need to identify businesses with high growth potential. The experience in the U.S. and the limited amount of work that has been done in Australia suggests that there is one over-riding factor that will drive a high growth business – the personality of the business owner.

Growing local businesses is largely about:

• Finding the right businesses to work with – the business owner will be a key determinant;
• Finding skilled mentors who gain the trust of the business and assist them with new strategies;
• Mentors who will help owners work on all aspects of their business – marketing, finance, legal, staffing, succession planning, product development…… ;
• Helping businesses to access new markets outside the region, given that our internal markets are not growing rapidly. In the U.S. there are highly detailed market research databases which help businesses to find new customers;
• Finding market niches within the region which are currently being serviced from outside;
• Finding businesses which can capitalise on external growth factors impacting on our region (e.g. the mining boom).

Innovation and entrepreneurship are strongly correlated with fast business growth and again, this has been found to be highly dependent on the temperament of the business owner or CEO. The ability to respond rapidly to change is important. Many high growth firms in the U.S. had a good mixture of chaotic ‘ideas people’ whose grand plans were moderated and shaped by stable ‘details’ people who turn the novel ideas into practical reality.

Companies with the ability to respond rapidly exhibit a ‘just do it’ mentality and it somehow comes together, rather than slowing themselves down with numerous meetings, committees and reports. This mode of operation is at odds with the processes of Government Departments, which may explain why funding activity in this area is limited.

In-fact, cutting edge thinking in the U.S. now favours ‘strategic doing’ over ‘strategic planning’, as strategic planning struggles to keep up with the pace of change in today’s economies.

Governments can work on getting the economic settings right to encourage high growth businesses. This includes effective markets for venture capital, and no unnecessary tax or regulatory barriers.
 

The Bottom Line

Growing local businesses is not easy. It takes time and resources. It requires a process for identifying businesses with growth potential and working with them. It needs mentors whom business owners will trust with confidential information.

Given the small number of businesses with potential, any new programs may also need to cater for business start-ups as well as growing existing firms.

Research overseas shows that high-growth firms are not just high-tech firms. Both high-tech and low-tech firms are capable of rapid growth if they find the right market niche.

We have struggled with regional economic development in Australia for decades now. General support programs have had limited success. It is time to try a different approach. RDANI is currently working up projects to make this happen.

David Thompson
Senior Project Officer
 

1. http://www.neighborhoodnotes.com/news/2012/05/is_economic_gardening_the_right_approach_for_job_growth_in_portland/

2. http://www.nesta.org.uk/library/documents/Vital-six-per-cent-Nov2010-v3.pdf