The (in)significance of home-based business

The entrepreneurial challenge is really one of economic organisation, of fostering high-growth firms

Tim_Vorley_100An Englishman’s home is renowned as his castle.  However, the Government’s Small Business Survey published recently again shows the growing number of home-based businesses.   While such businesses have been referred to as ‘invisible businesses’, of the c.4.5million enterprises in the UK it is estimated that today up to 70% are home-based.  Clearly, the home has again become an important place of business, just as it was before the industrial revolution.

At a glance, employment figures in the UK suggest that, rather than being a nation of shopkeepers, the British people are increasingly becoming a nation of (home-based) entrepreneurs.  This trend poses questions about the extent to which this growing army of self-employed individuals are entrepreneurial by any definition.  In stark contrast to the Schumpeterian definition of an entrepreneur which is premised on innovation and value creation, many home-based business can be classified as sole-proprietorship, with the owner business existing to provide a wage.

The growing number of home-based businesses may be seen to represent a step forward in the ambition of the Coalition government to create a more entrepreneurial economy.  A series of publications from the Department for Business Innovation and Skills has addressed micro business growth, and focussed on home-based businesses in particular.  Indeed, it is now more than six months since David Cameron announced a range of measures to make it easier for people to set up a business from home.  However, the question remains: do home-based businesses, and micro businesses more generally, represent the right kind of entrepreneurship for growth?

There still remains a question mark over the importance of those businesses with fewer than 10 employees, the vast majority of which are home-based.  Lord Young, the Prime Minister’s Enterprise Advisor, has now authored a trilogy of reports on small businesses which he refers to as ‘the vital 95%’.  He is quick to emphasise that the number of home-based businesses have increased by nearly half a million since 2010 and now contribute £300 billion to the economy.  But does this really matter?  The reality is that the economic impact of these home-based businesses is unlikely to increase unless these entrepreneurs are incentivised to grow their businesses.

Given that entrepreneurship is responsive to political conditions, institutional discourse has emphasised the importance of ‘the rules of the game’ in shaping the nature of entrepreneurial activity.  Government reforms have sought to improve the economic environment in which entrepreneurs operate so as to increase the scale of productive entrepreneurship.  That said, as Owen Parker noted in a previous SPERI blog, entrepreneurs will not save the world, not least because there is such variation in who we refer to as an entrepreneur.  There is a need here to recognise that entrepreneurship is about more than individuals; it’s actually about how institutions shape and determine the rules of the game.

The Coalition government has changed the rules of the game, but, as I’ve said, it is not just about getting more people to play the game.  It is much more about changing the way that people play the game.  Political economy can contribute to understanding and designing more effective institutional responses.  In relation to private enterprise, and home-based businesses in particular, this means raising ambition and promoting activities that systematically contribute to economic growth.  While government policy narratives emphasise supporting those entrepreneurs with growth potential, this remains difficult in practice.

The current approach of the Coalition government has sought to promote the visibility of home-based businesses and make it easier for ambitious small businesses to grow.  Such initiatives are important if home-based businesses are to become more productive and contribute to economic growth in a more systemic way.   However, this challenge is not one for the government alone.  The launch of Growth Hubs has seen Local Enterprise Partnerships become conduits for business support and funding.  The reality again is that raising entrepreneurial ambition and leveraging entrepreneurial-led growth involves a wider range of stakeholders.  This is further testament to the complexities of the Entrepreneurial State described by Mariana Mazzucato, not just in terms of the story of innovation, but equally the story of enterprise.

We have been repeatedly told that small and medium-sized enterprises (SMEs), and now home-based businesses, are the lifeblood of the economy; but, although they provide an important source of (self-)employment, they have not proved to be an engine of growth. Indeed, much like the shift from shopkeepers to supermarkets that redefined the retail sector in the 1970s, so the prospect of the entrepreneurial society is increasingly being played out in a corporate domain.  The significance of home-based businesses is lost.  Today’s large corporate businesses, much like the supermarket retailers of that earlier era, are highly connected across the political economy and represent the dominant share of business turnover.  The entrepreneurial intention and growth ambition of these businesses has seen corporate entrepreneurship, or ‘intrapreneurship’, become arguably a far more important source of competitive advantage.

So: where does this leave home-based businesses?  While new support for home-based entrepreneurs has provided greater freedom to start a business, the real issue is promoting the growth capacity of home-based business.  However, this challenge, as arguably has always been the case, is really one of economic organisation.  If entrepreneurship is to be better supported in the UK, then the political focus needs to shift.  It is not about more business start-ups or moving businesses out of the home.  The significance of home-based business, like any business, is dependent on fostering business growth.  It is high-growth firms that are central to macroeconomic performance, and they are poles apart from the vital 95% touted by Lord Young.  In fact, according to NESTA, these businesses are more like a vital 6% (not all of which are SMEs).  The answer to the greater realisation of entrepreneurial-led growth lies, therefore, at least in part in the political economy of ambition.  An ambitious task by any measure!