Sustainable highgrowth entrepreneurship A study of rapidly growing

Sustainable high-growth entrepreneurship: A study of rapidly growing firms in the Scania region Jonas Gabrielsson, Åsa Lindholm Dahlstrand Diamanto Politis CIRCLE, Lund University & Halmstad University International Workshop on High-Growth Firms, Organised by the Danish Business Authority and the OECD, Copenhagen 2012 -03 -28

Research on rapidly growing firms does not provide a very coherent picture of what characterize them • • few long term longitudinal studies of high growth entrepreneurial firms. empirical evidence suggest that high growth is rather an exceptional event in the life of a new venture, firms have a quite complex pattern of development where firm growth is highly uneven and where sustained growth over time is rather rare. Attributes of firms with a successful growth record have been found in a number of studies Different samples and timeframes have come up with contradictory or inconclusive results as much as 80 per cent of sample variance is left unexplained in some of these studies High growth is also a result of a mix of factors, at the firm level as well as the systemic level. Firm growth is in respect increasingly acknowledged as the outcome of a complex interaction carried out between multiple players in a networked context.

Growth paths Source: Garnsey et al 2006

High growth entrepreneurship in Sweden’s Scania region • What characterize firms with sustainable high growth? • What is different in these firms compared to firms with a temporary high growth? • What explain these differences, at the firmlevel and the local level?

Definitions The OECD-Eurostat definition of high-growth firms • “All enterprises with average annualised growth greater than 20% per annum, over a three year period, and with ten or more employees at the beginning of the observation period. Growth is thus measured by the number of employees and by turnover”. The recommended definition of “gazelles” is: • “All enterprises up to five years old with average annualised growth greater than 20% per annum over a three-year period, and with ten or more employees at the beginning of the observation period”.

Share of high-growth enterprises employment definition 2006 • • turnover definition 2006 Enterprises grow faster in terms of turnover than of employment. This is especially so in manufacturing Gazelles represent less than 1% (by employment) or 2% (by turnover) of the total population… … and less than one-fifth of high-growth enterprises. Sweden: • 3 -4% of firms have high employment growth • 10 -12 % have high turnover growth Source: OECD-Eurostat Entrepreneurship Indicators Programme, 2009

Sample of “gazelles” • “Gazelles” identified by the Swedish business newspaper Dagens Industri i) at least four full years of operations with a positive net result every year, ii) total sales of more than 10 million SEK, iii) at least 10 employees, iii) doubled their sales the past three years, iv) have “healthy” finances, and v) have grown organically (not through M&As). • • • Only companies that operate in the Öresund region of Scania in the period 2001 to 2007. The selection criteria led to a total sample of 544 companies Survey: questionnaires with complete responses from 206 companies (response rate of 37. 9 %) • • • Scania (Skåne) is a Swedish administrative county in the very south of Sweden. It is populated with about 1, 2 million people (13% of Swedish inhabitants). Both the Swedish and Danish sides of Öresund has experienced strong economic development since 2000 (opening of bridge) Today Öresund region generates a rough quarter of the combined GDP of Sweden and Denmark. The industry structure in Skåne include pharmaceuticals/biotech, IT /telecom, food, environment, logistics and design the regional economy in Skåne is - from the perspective of industry structure - a Sweden in “miniature”

Characteristics of responding firms Mean Std dev Firm age 19. 8 13. 7 No of employees in 2007 40. 4 50. 1 Sales in 2007 (MSEK) 87. 0 132. 5 % of regional sales 49. 8 38. 2 % of international sales 16. 9 27. 9 High technology manufacturing . 06 . 25 High tech services& manufacturing (HTKIS) . 16 . 36 Knowledge intensive services . 22 . 42 Company spin-off . 16 37 University spin-off . 02 . 14 • These rapidly growing firms are relatively old and small • a greater part of their sales come from the local market rather than from international sales • the gazelles are spread across a wide range of different industries. • Few firms are in high-tech sectors (manufacturing of service) • Only 4 firms are university spin -offs. 30 are corporate spin-offs

Continued growth of former Swedish gazelles Frequency (N=193) Low/no sales growth Low/no employee growth Sales growth >. 10 Sales growth>. 20 Employee growth>. 10 Employee growth>. 20 Sales/Emp gr>0. 1 Sales/Emp gr>. 20 Percent 108 56, 0 109 56, 7 85 44, 0 11 5, 9 83 43, 5 17 8, 9 112 58, 0 23 12, 0 • 9 firms bankruptcy (4. 4%), 2 inactive (1%) and 2 M&As (1%) • 5. 4% of these former gazelles show sustainable high employment and turnover growth (2007 -2009) – 5. 9% show high turnover growth – 8. 9% show high growth in employees • 12% show high growth with either the turnover or the employee definition • The majority of the firms show limited or no growth

Firms with sustainable growth… sustained temporary Signlevel (2 tailed) 1991 1983 0. 052 Ph. D education , 09 , 49 . 005 Company spin-off , 13 , 16 . 707 Academic spin-off , 04 , 02 . 570 University research - own 1, 78 1, 25 . 294 University research - other 1, 00 1, 48 . 000 Customer contacts 3, 93 3, 80 . 761 Suppliers 2, 92 3, 09 . 734 Competitors 2, 80 2, 84 . 927 Private idea - own 4. 16 4, 24 . 796 Previous employer in industry 3, 82 3, 32 . 378 Employed by university , 00 , 02 . 045 Self employed , 17 , 34 . 065 Year of founding • . . are younger than the firms with temporary high growth • …have no founders with previous university employment • … and few with Ph. D education. • Industrial employment most common • Few firms based on university research • Relatively few are serial entrepreneurs

R&D and University collaboration sustaine d temporary Signlevel (2 tailed) No cooperation , 65 , 67 . 880 Cooperation but not in Scania region , 00 , 05 . 002 R&D tasks , 04 . 965 Consulting , 00 , 06 . 001 Discussions , 04 , 11 . 175 Joint R&D , 04 . 863 R&D documents , 00 , 02 . 083 R&D facilities , 00 , 04 . 014 Recruitment , 17 , 14 . 667 • Firms with sustainable high growth have very little collaboration with universities – inside as well as outside the Scania region • Firms with temporary high growth have more significant collaborations with universities • Only 9% of firms with sustained growth do R&D on their own (19% of the temporary high growth firms) • There are no significant differences in innovative behaviour

Export and performance sustained Percent of total sales from customers in Öresund region temporary Signlevel (2 tailed) 60, 61 48, 79 . 178 Novelty in offerings* 1, 36 1, 25 . 323 Exporting countries 2, 84 6, 30 . 100 New exporting countries last three years , 56 2, 23 . 002 Countries with employees on paylist , 80 1, 71 . 030 Percentage of sales from exports (2007) 9, 35 17, 45 . 167 Percentage of workforce in other countries 4, 05 3, 38 . 819 Profit (last 3 years) in relation to competitors 3, 67 3, 66 . 994 4, 00 3, 54 . 022 -Cash flow (last 3 years) in relation to competitors • Sustainable highgrowth firms have relatively limited export focus • Temporary highgrowth firms have export activities in more countries • Sustainable and temporary high growth firms are profitable, • But sustainable high growth firms have a considerably better cash flow *1=Similar products/services, 2=Significant improvement products/services, and 3=Unique products/services

Explaining sales growth? Model Standardized Coeffic ients t Sig. Beta (Constant) -1, 000 , 321 Year of founding , 105 , 834 , 408 Company spin-off , 182 1, 517 , 135 -, 024 -, 191 , 849 Self employed , 128 1, 074 , 287 Percent of total sales from customers in Öresund region , 290 2, 077 , 042 Cash flow , 236 1, 878 , 065 Novelty in offerings , 133 1, 161 , 250 Countries with employees on paylist , 128 1, 025 , 309 Percentage of sales from exports (2007) -, 266 -1, 842 , 070 Profit -, 012 -, 092 , 927 , 253 2, 193 , 032 University research other Knowleddge intesive sector R=, 557 a, R Square=, 310, Adjusted R Square=, 182 F (Fsign) 2, 414 (0, 01) • Factors significantly affecting sales growth include: +KIS +Local customers +Cash flow -export • BUT - as in many other studies - most of the sample variance is left unexplained

‘Dynamic Capitalism Typology’ of entrepreneurial firms (Kirchhoff, 1994). RESOURCE CONSTRAINED III GROWTH HIGH II INTERNALLY GLAMOROUS CONSTRAINED BUSINESS INNOVATION RATE LOW GROWTH I IV ECONOMIC CORE AMBITIOUS © Kirchhoff, 1994 LOW HIGH BUSINESS GROWTH RATE • ”Glamorous” firms have highest growth • Glamorous firms are nice. . . and some are necessary for growth • There are five times as many ”ambitious” firms as there are ”glamorous” ”Ambitious” firs are often seen as exceptions ”glamorous” and ”constrained” firms are usually focused • Ambitious firms are more important for job creation through firm growth • Economic core firms create growth through new firm formations • Constrained growth firms need attention • •

Continuous growth: Sustainable and temporary high growth firms high knowledge 27 14% 4 2% 141 74% 19 10% intensity low high >20 continuous growth • 16% of the firms are high tech knowledge firms. 13% of these are high-growth ”Glamorous” firms • 84% are not knowledge intensive, 12% of these are high-growth Ambitious firms • There are five times as many ”ambitious” high growth firms as there are ”glamorous” • The high-growth glamorous firms do not show higher growth than the high-growth Ambitious firms

Innovative entrepreneurship policy targets High IIa) III IIb) Business innovation rate I Low IV Low High Business growth rate In order to increase economic growth through innovative high growth entrepreneurship there at least three important policy options: • Increasing entrepreneurship in general (entrepreneurial climate, education etc) (all quadrants, I to IV) • Increasing the frequency of high-growth firms (resources, financing, networking, etc. ) (quadrants I, IIa and IIb) • Increasing innovation and R&D in SMEs (networking, universities, etc. ) (quadrants I and IV)

Summary and conclusion • • • the high growth firms in the sample are spread across a wide range of different industries Only a handful are in technology intensive sectors collaborations between high growth firms and universities are quite modest, especially so among the sustainable growth firms the majority of the firms had been involved in improving existing products or services and developing new market. but we found no associations between innovation activities and continued firm-growth • • • 5 -12% of the firms show sustainable high growth The majority of the firms show limited growth (sales/employees) The temporary high-growth firms are more internationalised and export more The sustainable high growth firms focus on the local market The sustainable high growth firms have a considerably better cash flow than their competitors

Policy implications OECD (2010): “…most of the initiatives used to promote the growth and high-growth of firms rely on the facilitation of access to finance and the support to R&D and innovation. As argued, policy initiatives in these areas, though critical, need to be matched with support to training and skill upgrading in new and small firms, and with the encouragement of growth ambitions. ” • Public policy promoting innovation and economic growth must also involve instruments promoting entrepreneurship. Entrepreneurship policy and innovation policy areas need to be integrated. • The promotion and increase of innovative high growth entrepreneurship include – the encouragement of entrepreneurship in general, – increasing the frequency of high-growth firms among the innovative ones, – increasing R&D and innovative activities among “ambitious” firms.