Should the UK industrial strategy be based on SMEs?

Developing a Mittelstand to rival Germany's will be harder than it looks.

by Adam Gale
Last Updated: 13 Apr 2017

The government is keen for its industrial strategy to be as un-1970s as possible. Its green paper self-consciously distances it from the bad old days of mauve flares, British Leyland picket-lines and ‘picking winners’. Instead of focusing on industries where we’re already strong, it sets out its intention that long-term success will be distributed among different regions and sectors.

Small and medium-sized businesses are at the heart of that hope. They’re not only the firms most of us work for today, but also they contain within their ranks the big businesses of tomorrow. Ideologically it’s appealing too – there’s a reason business-bashing does not extend to your salt-of-the-earth, local family butchers.

Given the ‘small is beautiful’ vibe of the industrial strategy, and the emphasis on long-term thinking and investment, it’s odd that the word ‘Mittlestand’ doesn’t appear even once in the green paper. Everyone knows that if you want a healthy SME culture (emphasis on the M), there’s no better role models than the Germans.

The German Mittelstand is as much an ethos as a category. Its typical business will turn over less than €1bn, be privately owned, probably by the same family that founded it a hundred years ago, and lead the world in a particular niche.

Research from Chris Carr and Alessa Witt at the University of Edinburgh Business School found Germany has approximately 20 times more ‘global niche champions’ than the UK does. No wonder not everyone is convinced the ‘Brittelstand’ is up to the challenge.

The government has figured that this relative deficiency could partly explain why our productivity continues to lag. Put simply, German companies invest for the long term, and ours don’t.

This isn’t just a matter of Teutonic temperament. Private businesses have been shown to invest substantially more in fixed assets than quoted companies of similar size, and manufacturing firms tend to invest more than service providers. The landscape of British business on the other hand is dominated by finance: we list our companies rather than hand them on to our kids, and listed companies generally tend towards short-termism.

Copycats?

You can see why an industrial strategy that mimics the German approach might seem pretty good to a government desperate to figure out ways to boost exports after we leave the EU. But, as they say, the grass is always greener on the other side.

There are things about our economy that the Germans will envy too. As the green paper points out, the British are an entrepreneurial bunch, coming in very highly in OECD measures for new start-ups. We have centres of academic excellence that Germany doesn’t have (because we’re generally more centralised). And pound for pound our big businesses punch as hard as anyone’s.

Yes, the Mittelstand undoubtedly provides an enviably strong industrial base, but it’s brittle: long-term, niche businesses are great when things are going well, but by definition they are not agile or resilient to rapid changes in the market. If you’ve led the world for 50 years in producing a particular type of valve, then overnight it becomes obsolete, you’re in trouble.

Look at Japan. Sony, Panasonic, Toshiba and the others weren’t exactly private niche players, but they did take a very long-term view. It worked for a long time; they dominated numerous sectors, but right now they just can’t turn fast enough for a market that’s changed direction. This hasn’t happened to German Mittelstand industrial firms yet - perhaps because they operate in so many, unrelated niches - but that doesn’t mean it can’t or won’t.


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An economy filled with finance-led big businesses and rapidly moving start-ups seeking a big exit may not be as strong, but it is malleable, it is adaptable. What you really want is an alloy of both.

So yes, the government should focus on SMEs, particularly the mid-sized businesses because that’s where we have the greatest room for improvement. If we could see entrepreneurs scaling more effectively, making better use of our academic research strength, and crucially holding onto their businesses rather than selling them for a quick buck, then it would add a huge long-term boost to the UK economy.

Whether the government can achieve that is far from clear, however. It’s talking about building on our educational foundations, particularly in STEM, and providing tailored support and advice (and a little money) to fast-growing start-ups to help them scale. There’s a lot of ‘encouraging’ in there, whether that’s of long-term strategic planning, late-stage VC investment or corporate R&D.

Ultimately, though, without a paradigm-shifting level of dosh (the kind that kick-started such diverse ecosystems as Silicon Valley and the US aerospace industry) or some profound legal and regulatory change to the investment landscape, this is going to be like any other top-down attempt at altering business culture: swimming against the tide. 

Image credit: Michael Hendryckx/Wikipedia

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