Ernst & Young: Yorkshire midcaps will be key to economic growth
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Stuart Watson, Partner at Ernst & Young, looks at the contribution made to the region’s economy by midcap businesses. Economic growth over the next two years is set to be driven by thriving innovation and enterprise among Yorkshire’s midcaps. A recent report from Ernst & Young, Growing Britain into Recovery: Putting Midcaps on the Map, reveals that UK midcaps are seeing opportunities in these challenging markets and are investing in innovation. They are more confident after the difficulties of 2008/9 with 81% expecting to see profits increase in the next two years – one in 10 expecting 21-50 per cent 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. It is clear that midcaps 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. Caught in a polarised political and regulatory environment Despite forming a powerhouse of economic growth, many midcaps feel overlooked or misunderstood by a political and regulatory environment that is polarised between large corporations or small businesses. A third believes the regulatory environment and 29% the tax environment will not be supportive of them in coming years. Three in 10 (28%) say a lack of understanding of mid-sized companies amongst politicians will hamper their growth and a quarter (23%) worry the financial and investment climate won’t help. Asked what measures would most foster greater innovation amongst midcap businesses, a quarter (23%) cited a reduction in regulation and 14% more tax breaks for investment in R&D, patent and licence applications, market research and technical training. Investing in innovation 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, 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. Midcaps’ drive to grow extends into creating a culture of innovation among all staff, despite employee having large employee headcounts. Almost half (47%) recruit highly skilled people and acquire knowledge from outside the business, while two fifths (41%) encourage brainstorming, creative thinking and idea generation. One in six (16%) employs a ‘Head of Innovation’ or similar. Spirit of enterprise Trouncing misconceptions that the spirit of enterprise resides solely within small businesses, 63% of midcap respondents consider 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. International reach Midcaps are also reaching well beyond the UK. 25% invest 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%), suggesting untapped potential for further investment – and growth – in territories such as Asia-Pacific (5%) and the emerging markets. Expansion into foreign markets will be crucial for midcaps’ continued growth. If the mantra during the downturn was innovate or die, the key theme for the recovery could be export or die. At the moment, foreign markets are largely untapped and those that are being explored tend to be the traditional trading territories. But if UK midcaps are to thrive globally, they will need a supportive government working in their interests – and those of the country as a whole – to ensure British business is globally competitive. UK mid-sized businesses feel they are being overlooked by government, business organisations and regulators. In testing times and with a new government at the helm, midcap firms deserve better recognition and support for their contribution to the UK and global economy. More articles in
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