Midcaps set to invest in innovation – E&Y

ECONOMIC growth over the next two years is set to be driven by thriving innovation and enterprise among UK midcaps, according to a new report from Ernst & Young.

The report, Growing Britain into Recovery: Putting Midcaps on the Map, reveals that UK-based midcaps are to invest an estimated £109bn in innovation by 2012, providing the dynamism needed to fuel their growth.

As a result, 81% expect to see profits increase in the next two years – with one in 10 expecting 21-50% growth. Only 7% expect profits to decline in coming years.

In turn, this will boost the broader economy, as two fifths of midcaps (41%) expect their largely overlooked sector to drive UK growth by 2012, with a third (33%) citing a major role in job creation.

Ronnie Bowker, Birmingham senior partner at Ernst & Young, said: “It is clear that UK mid-sized businesses are a hotbed of innovation and enterprise, and a driving force for economic growth. These are not lumbering giants of industry or precarious fledglings feeling their way, but employment-creating, dynamic and ambitious organisations with their sights firmly set on growth.”

The research, conducted by YouGov, suggests that despite their key role in generating growth, many midcaps feel overlooked or misunderstood by a political and regulatory environment that is polarised between large corporations or small businesses.

A third believe the regulatory environment will not be supportive of them, while for 29% of midcaps it is the tax environment that concerns them most.

Almost three in 10 (28%) say a lack of understanding of mid-sized companies by politicians will hamper their growth and a near quarter (23%) worry the financial and investment climate won’t help.

Asked what measures would most foster greater innovation amongst midcap businesses, a 23% cited a reduction in regulation, while 14% said more tax breaks for investment in R&D, patent and licence applications, market research and technical training.

Quoted in the report Ernst & Young Entrepreneur Of The Year regional winner, Martin Jones, who developed his small family-owned heating-maintenance firm PH Jones into a national multi-trade business employing over 1,000 employees and turning over £80m a year, said: “We’re expected to compete with largecaps on the same level but without the resources that they have – and yet we’re precluded from some of the advantages given to small businesses. We’re caught between two stools.”

With greater resources than SMEs, midcaps’ investment in innovation is significant. R&D, market research and technical training are earmarked for the highest spend in coming years at an estimated £12.8bn by 2012. This will be closely followed by diversification and bringing new products or services to market (£11.6bn) and development of new, innovative and proprietary technology or prototypes (£11.6bn). Consequently, seven out 10 of midcap managers (69%) view their company as innovative – 21% highly so.

Almost two thirds (63%) of respondents considered their company to be entrepreneurial – 15% very entrepreneurial – despite only 13% being owned or run by an entrepreneur or entrepreneurial senior management team.

And the relatively large size of these firms is no barrier to speed and flexibility of action – traits widely ascribed almost exclusively to SMEs. The report reveals that midcaps adapt their business model to stay ahead in challenging economic conditions (59%), maintain a clear vision for the future of the business (51%), and act quickly to overcome challenges or obstacles (41%).

While such nimbleness has helped midcaps negotiate the recent downturn, it has also left them in the position to maximise opportunities during the recovery: underlining the ambition of this stratum of the economy, 17% boast rapid growth plans.

Midcaps are also reaching well beyond the UK, with 25% investing heavily in entering new geographical territories, with £11bn in overseas investment planned over the next two years.

Yet while 41% of midcaps derive most of their profits from overseas markets, these are largely the traditional territories of Western Europe (15%) and North America (15%), with the BRIC markets accounting for just 5%.