UK enterprises and investment in capital and training

The UK enterprise population

It is often said that small and medium-sized enterprises, or SMEs, are the backbone of the UK economy. According to the latest available data, in 2022 there were 5.5 million private sector businesses in the UK.

Nearly all of these businesses – 99.9 per cent – were SMEs (employing 0-250 people). The vast majority of these (5.47 million) were small businesses (with 0 to 49 employees), who made up 99.2% of the total business population. A substantial proportion (5.2 million) were microbusinesses (employing 0-9 people), accounting for 95% of all businesses.

Overall, SMEs accounted for 61% of private sector employment, and microbusinesses for 32%. Although large businesses made up just 0.1% of the business population, these firms accounted for 39% of employment. Notably, though, the UK private sector consists of more non-employing businesses than it does employing businesses; there were 4.1 million businesses with no employees in 2022.

The UK has a vibrant entrepreneurial culture. There were 4.2 million people in self- employment in the UK in 2022, accounting for 13% of total employment. Data from the UK Global Entrepreneurship Monitor (GEM) survey indicated that around 1 in 3 adults were either running a business or looking at starting one in 2022.

However, it is also true that many small businesses don’t survive beyond the first few years. According to the ONS, the five-year survival rate for UK businesses born in 2016 stands at 38.4%. There is a high level of turbulence in the enterprise landscape, with just over a quarter of all jobs in the private sector either destroyed or created over a typical 12-month period (Hart and Prashar, 2019).

Business investment in the UK

Business investment in physical and human capital can bring productivity benefits and is important for firm survival and growth. However, there is evidence that the UK has a problem with low levels of business investment. The Bank of England has noted that UK business investment has been negatively affected by the Covid-19 crisis, as well as the decision leave the EU – both of which have created considerable uncertainty for business leaders (Bank of England, Quarterly Bulletin 2021 Q2, 25th June).

A recent paper by the Institute for Government notes that the UK’s relatively poor performance has led to “suspicions that there are structural features of the UK economy, its business culture and its institutions, that lead to more short-termism and aversion to investment” (Wilkes, G., 2022, Institute for Government Report). These attitudes and behaviours are particularly apparent amongst smaller businesses, who also face more barriers accessing finance.

A recent paper by the Institute for Government notes that the UK’s relatively poor performance has led to “suspicions that there are structural features of the UK economy, its business culture and its institutions, that lead to more short-termism and aversion to investment” (Wilkes, G., 2022, Institute for Government Report). These attitudes and behaviours are particularly apparent amongst smaller businesses, who also face more barriers accessing finance.

Business investment in research and development

In recent years, increasing attention has been paid to the importance of firms investing in intangible assets (including intellectual property, human capital and research and development R&D). According to (revised) ONS data, UK firms spent £46.9 billion on R&D in 2021.

However, the UK still lags far behind international leaders in this area. SMEs accounted for a substantial £23.3 billion of private sector investment, although R&D in smaller companies is often more informal in nature than in larger firms, and SMEs face more difficulties in financing their innovation activities (Roper and Love, 2013).

Research has shown that R&D investment tends to be pro-cyclical, rising in recovery and falling sharply during times of crisis, partly due to the financial constraints faced by firms. Roper and Turner (2020) found that the proportion of innovating firms in the UK fell by around a third during the great financial crisis. They note that the Covid-19 pandemic is likely to have similar effects, with the most significant impacts on the ability of SMEs to sustain their R&D and innovation activities.

Business investment in training

One of the most important investments a business can make is in the skills of its workforce. According to the most recent Employer Skills Survey (ESS), undertaken pre-pandemic, UK employers invested £42 billion in skills in 2019. However, the UK has seen a long-term decline in spending on training per employee in real terms by 28% between 2005 and 2018.

In the 2019 ESS, three-fifths (61%) of employers had funded or arranged training for any of their employees over the previous 12 months. This is slightly lower than the level found in earlier surveys (in 2011 to 2017) when two-thirds of employers (65%-66%) had provided training over the previous 12 months.

Concerns have been expressed about the quality and content of the training that is delivered within UK workplaces too, with the ESS series finding that most training is job specific and that substantial proportions focused on basic induction or health and safety training. Fewer than 20% of employers provided management training in 2019.

There are long-established patterns in terms of training by establishment size which show that training increases substantially as establishment size increases. The latest ESS findings show that less than half (46%) of employers with 2 to 4 employees provided training, compared with three-quarters (75%) of those with 5 to 24 employees, and almost all (92%) of those with 25 or more employees. The proportion of staff trained also increased as establishment size increased. Around one-third (36%) of staff in establishments with 2 to 4 employees received training, compared to two-thirds (67%) in establishments with 250 or more staff.

The overall picture that emerges from the data is that smaller employers are significantly less likely to provide training than larger ones, with investment in training falling most amongst small employers over time. Employer investment in training fell more sharply during the pandemic than it did in the financial crisis, indicating that the decline is likely to deepen looking forward.

Facing realities

Developing workforce skills is one of the most important investments that a business can make and will be essential for firms as they recover from the shock of the Covid-19 pandemic and economic downturn that has followed.

But addressing the long-term decline in investment in training in the UK is a real challenge that requires sustained intervention, and an appreciation of the realities of the context of the wider business and investment landscape.

Recommendation 1

Policymakers need to be sensitive to the realities of the UK’s business landscape, which is dominated by SMEs, and particularly by small firms. An emphasis needs to be given to ensuring that the needs and constraints faced by SMEs are fully understood, and policy solutions should be targeted to them appropriately.

Recommendation 2

More work needs to be done to develop an innovative, long-term mindset amongst SME leaders. This will involve a combination of tailored business and financial support. Evidence from the great financial crisis suggests that firms that invest in innovation tend to have better survival chances, stronger growth, and higher profitability. Encouraging innovation is also likely to have positive knock-on effects in terms of investment in training.

Recommendation 3

There is a strong link between the management and leadership skills of business owners and business survival and performance – yet, only a minority of firms provide management training. Publicly funded management skills programmes should be made accessible to a wider set of businesses, including the smallest businesses and the self-employed. The design of these programmes should draw on the high quality evaluation evidence from existing programmes (such as the Help to Grow scheme) to ensure good practice is reflected.

By Dr Vicki Belt, Deputy Director, Enterprise Research Centre, Warwick Business School

This article is part of Campaign for Learning’s series: ‘Driving-up employer investment in training – pressing the right buttons’.

Part One: Employer investment in context

1. Louise Murphy, Economist, Resolution Foundation: Investment in the round
2. Dr Vicki Belt, Deputy Director, Enterprise Research Centre, Warwick Business School: UK enterprises and investment in capital and training
3. Becci Newton, Director, Public Policy Research, Institute of Employment Studies: Employer investment in training in England

Part Two: Drivers of employer investment in training

4. Neil Carberry, Chief Executive, Recruitment and Employment Confederation: Derived demand, British management and employer investment in training
5. Ewart Keep, Professor Emeritus, Education Department, University of Oxford: Strategies to drive-up employer investment in training
6. Sam Alvis, Head of Economy, Green Alliance: Transitioning to net zero, green skills and employer investment in training
7. Dan Lucy, Director of HR, Institute of Employment Studies: Job quality, job design and driving-up employer investment in training
8. Natasha Waller, Policy Manager, LEP Network: Local inward investment, business support and employer demand for training
9. Jovan Luzajic, Acting Assistant Director of Policy, Universities UK: Universities, R&D, business innovation and meeting employer skills needs
10. David Hughes, Chief Executive, Association of Colleges: FE colleges, business innovation and meeting employer skills needs

Part Three: Increasing employer investment in training

11. Paul Bivand, Labour Market Consultant: Why should employers invest in training in a flexible labour market?
12. Aidan Relf, Skills Consultant: Why should employers invest in training with large net worker migration into the UK?
13. Stephen Evans, Chief Executive, Learning and Work Institute: Raising employer investment in training
14. Robert West, Head of Education and Skills, CBI: Increasing employer investment in training
15. Lizzie Crowley, Skills Policy Adviser, CIPD: Encouraging employer demand for training
16. Anthony Painter, Director and Daisy Hooper, Head of Policy and Innovation Chartered Management Institute: Increasing employer demand for management training

Part Four: Raising employer demand for publicly funded post-16 education and skills

17. Jane Hickie, Chief Executive, AELP: Increasing employer demand for post-16 apprenticeships in England
18. Mandy Crawford-Lee, Chief Executive, UVAC: Increasing employer demand for level 4-5 technical education in England
19. Ian Pryce, Principal, The Bedford College Group: Increasing employer demand for higher technical education in England

Part Five: Raising employer demand for work placements

20. John Widdowson, Board Member, NCG: Increasing employer demand for work placements for level 3-5 vocational courses in England
21. Stephen Isherwood, Joint Chief Executive, Institute of Student Employers: Increasing employer demand for undergraduate work placements in England