Going back to bas[e]-ics – How has Scotland’s Business Base changed?

Over the past few months, we have talked extensively about the threat facing businesses in the wake of the ongoing COVID-19 economic crisis, and the potential implications for our economy in the months and years ahead.

The UK Government has provided record support for businesses through the furlough and self-employment income support scheme. However, the furlough scheme, which has supported almost 780,000 jobs in Scotland, is coming to an end this month. Its replacement – the Job Support Scheme – is much less generous and we are already seeing a rise in confirmed and planned job losses across the economy.

With an economic crisis looming, we thought that it would be helpful to unpick what we know about the underlying business base in Scotland. And in particular, how the current business base is equipped to deal with the current economic uncertainty given its changing nature over the last few years.

How has the business base grown?

In terms of the number of businesses in Scotland, growth has been relatively sustained – and steady – over the past decade.

Business count data for in 2019 recorded the second-highest stock figure since 2010. There were 356,765 total businesses, both registered and unregistered, in 2019, near 60,000 more businesses than in 2010. See Chart 1.

Chart 1: Number of Business (registered and unregistered) in Scotland 2010-2019

Source: Scottish Government

The majority of this growth has come from a rise in the number of unregistered businesses. An unregistered business is defined as one that is “not registered under the official Companies Act, operating with a single owner or partnership operating a business for profit”. These are typically very small businesses. The number of unregistered businesses grew 24% since 2010 – up around 34,000.

A growing business base is generally seen as a good thing. Increasing numbers of people starting up businesses is generally a signal about the health of the economy, and new businesses are important sources of innovation and entrepreneurship. In turn, this can help boost productivity and growth over time. However, the growth in the unregistered business base is primarily driven by changes in the way people working, whether it be through flexible working practices or an increase in self-employment.

Scotland performs weaker when compared to rUK in terms of the pace of growth in the business base – around 10% lower in Scotland in 2019, and consistently lower than rUK since 2014. See Chart 2.

Chart 2: Business Base Growth Scotland & UK, 2010 – 2019

Source: Scottish Government and UK Business Population

How has the composition changed over the years?

The sectoral split of the Scottish economy has played a key part in how the economy has been affected by the pandemic.

Over the past 20 years, there has been a decline in the relative share of the manufacturing sector. In terms of the relative share of the economy, the sector is just half the size it was in 1998. The reduction in the size of this sector has been coupled with strong growth in the size of the services sector. See Chart 3.

Chart 3: Scotland sector share of GVA, 1998 – 2018

Source: ONS

Take construction for example. As we can see from Chart 3 above, its sector share has remained relatively small at just 6% over the past 20 years. In terms of the number of businesses, the construction sector has the most. In 2019, there were 51,510 enterprises in the construction sector, the highest business count across all 18 industries. Over the past decade, the construction sector has shared the highest business share with the Professional, scientific, and technical activities sector, which has the second-highest stock figure in 2019 with 51,325 businesses. The high count in construction is driven by the large number of small self-employed plumbers, builders, electricians, etc. operating across the country.

Elsewhere, there has been significant variation in the relative growth performance of different sectors across the economy.

The number of businesses in the mining, quarrying, and utilities sector more than doubled between 2010 and 2019, with large business growth also experienced in the Information and communication (5,835 businesses), Financial and insurance activities (1,525 businesses), and Administrative and support service activities (10,040 businesses).

Table 1: Number of businesses in Scotland by Sector, 2019

Sector	Total	% of total	% difference 2010 – 2019
Agriculture, Forestry, and Fishing	18,490	5%	-8%
Mining and quarrying, utilities	4,225	1%	134%
Manufacturing	17,530	5%	26%
Construction	51,510	14%	8%
Motor trade incl. vehicle repairs	6,180	2%	4%
Wholesale trade	7,545	2%	-4%
Retail trade incl. fuel sales	19,780	6%	-4%
Transportation and storage	21,900	6%	1%
Accommodation and food service activities	19,465	5%	13%
Information and communication	17,300	5%	51%
Financial and insurance activities	4,235	1%	56%
Real estate activities	6,780	2%	30%
Professional, scientific, and technical activities	51,325	14%	43%
Administrative and support service activities	28,220	8%	55%
Education	14,420	4%	23%
Human health and social work activities	25,205	7%	11%
Arts, entertainment, and recreation	15,970	4%	18%
Other service activities	26,480	7%	30%

How has the size of businesses changed?

In one of our articles last month we discussed how businesses were faring in Scotland and what the response of many firms would be in the coming months. What has become increasingly evident since then is that businesses most at risk are small firms with less than 50 employees.

Chart 4 shows that the share of medium and large enterprises has not changed since the start of the noughties, with businesses employing more than 50 employees; accounting for around 2% of total businesses in the economy.

The real change has been experienced by smaller firms, in particular, the rise in the number of businesses with zero employees. Between 2000 and 2019, the number of businesses with zero employees, i.e. companies comprising solely of an owner/director; increased by 71%, with 100,000 more businesses in 2019 than in 2000. This represents an 8-percentage point (p.p.) increase in the share of total businesses with zero employees.

A similar story holds for those enterprises with 1-49 employees. The number of these smaller businesses has increased by 17% since 2010, with 4,860 more businesses today than a decade ago. However, the share of total businesses that these small enterprises account for has fallen 8-p.p., highlighting the transition from small to zero employee businesses that is currently underway in the Scottish economy.

Chart 4: Share of business Size, Scotland, 2019

Source: Scottish Government

When compared to the rUK, the composition of businesses is rather different to other parts of the UK, particularly when looking at small businesses. These businesses, employing between 1 and 49 employees, accounted for 28% of businesses, a larger share than regions such as London (22%), North West (24%), and Wales (25%). Similarly, though, the rest of the UK’s regional business share is dominated by zero employee enterprises, which when comparing Scotland has the lowest share of these sizes of firms.

Chart 5: Proportion of businesses in the private sector by region, UK, 2019

Source: UK Government

This rise in the number of small businesses has not altered the proportion of employment and turnover made up by different-sized businesses, however, with large firms continuing to drive large shares of Scottish employment and turnover.

When comparing small, medium, and large enterprises across the UK, large firms make up around 1% of total business in Scotland, yet contribute around 45% to Scottish employment, or around 963,000 employees; and, 59% of business turnover in Scotland. See Chart 6.

This is why – like it or not – large businesses are so important to the economic success of a country. Whilst they may be small in number, they employ lots of people. It’s one of the reasons why so much time and effort is spent on trying to attract inward investment to the country.

But it’s also risky too. Some may have concerns about the level of influence larger businesses can have over policy development. Others may fear that if policy choices are not made with their interests in mind – or policy is seen to be less supportive of business – they may choose to locate somewhere else with significant implications for jobs.

Chart 6: Share of businesses, turnover, and employment by size, Scotland, 2019

Source: Scottish Government

Furthermore, just under a quarter of large firms operating in the private sector, in some capacity, in Scotland accounted for around 46% and 40% of Scottish employment and turnover respectively.

In summary, we can see that small businesses make up the majority of total businesses operating and based in Scotland, with most of their income and employment in Scotland.

Domestic and Foreign business ownership and location

The dominance of large businesses in the economy also reveals some interesting facts about the ownership of businesses in Scotland. In particular, how many businesses registered elsewhere in the UK are based in Scotland and how many businesses are foreign-owned.

As of 2019, 97% of businesses registered in Scotland had their headquarters based here, with the additional 3% of businesses based in either the rest of the UK or abroad. There were 2,870 foreign-owned businesses operating in the private sector, a 10% increase on 2018, with nearly 1,000 more foreign-owned businesses in the economy than there was in 2010.

The makeup of businesses in Scotland has remained fairly constant over the past decade, with Scottish, rUK, and foreign businesses sharing the same proportion of total businesses since 2010.

However, when looking at the share of turnover and employment across business ownership, the story is slightly different.

Scottish based businesses comprise the largest share of employment and turnover, 64% and 46% respectively.

However, foreign-owned businesses, with less than 2% of the total number of businesses operating in Scotland account for 18% of Scottish employment and 35% of business turnover.

rUK registered businesses – again less than 2% of the total number of businesses in Scotland – account for 17% and 19% of total employment and turnover in Scotland respectively, see Chart XX.

In short, over half of the turnover generated in Scotland each year from within the business community comes from businesses that have headquarters based elsewhere.

Chart 7: Private sector share of businesses, employment, and turnover by business ownership, 2019

Source: Scottish Government

Interestingly, if anything, the influence of non-Scottish headquartered firms has increased in recent years.

Over the past decade, the number of foreign-owned businesses operating in Scotland has also grown faster than firms owned and based in Scotland, in particular, the number of EU-owned businesses.  See Chart 8.

Of foreign-owned businesses, those based in the EU and operating in Scotland have grown faster than those businesses owned elsewhere in the world. Around 35% of foreign-owned businesses turnover in Scotland is also attributed to EU-owned businesses, as well as a similar proportion of employment (37%), highlighting the growing role that EU businesses now play in the Scottish economy.

Chart 8: Foreign-owned business growth in Scotland, EU, and RoW, 2010 – 2019

Source: Scottish Government

What does this mean for policy?

Firstly, it highlights the importance of understanding the different make-up of the business base in Scotland. Small businesses – particularly vulnerable at this time – make up the vast majority of businesses in Scotland, and employ lots of people. But we also have to be concerned about how larger businesses are faring given how vital they are in supporting jobs and turnover.

Secondly, foreign-owned businesses are crucial in helping to support jobs and earnings in Scotland. We also know that foreign-owned businesses are much more likely to export and innovate than others. The Scottish Government’s Trading Nation report estimates that businesses operating in Scotland but based elsewhere in the world account for the highest share of the top 500 exporting businesses in Scotland. In fact, of the top 100 businesses exporting from Scotland, nearly 70% were owned abroad. Or in other words, businesses with a higher propensity to export, also have a higher propensity to be foreign-owned, with these businesses also accounting for a large share of the Scottish economy, shown in Chart 9.

Thirdly, the geography of ownership is particularly important in key sectors. In manufacturing for example, with a 10% share of the Scottish economy and around 30% of exports, 15% of foreign-owned businesses in Scotland are in this sector. This is followed by sectors such as professional, scientific, and technical activities, accounting for 14% of total exports and 13% of foreign-owned businesses; and wholesale and retail trade, with 21% of foreign-owned businesses and 8% of exports.

Fourthly, constitutional debates of all forms – from Brexit through to Scottish independence – clearly matter too for overseas businesses.

Chart 9: Share of businesses with a propensity to export and be foreign-owned, 2019

Source: Scottish Government

Whether or not such a high propensity of foreign ownership is good or bad for the economy is open to debate. Internationally owned firms can bring significant advantages in terms of new investment, new ideas, better management practices, and higher levels of innovation.

But sometimes these benefits might not always be realised, particularly if the quality of jobs being created is at the lower end. And whilst much of the activity (employment and turnover) might be taking place here, the proceeds in terms of profits and income might end up flowing outside the country.

We understand that the Scottish Government is due to publish a revised international investment strategy in the coming weeks. Coming at a time of substantial upheaval in the economy, and the challenges that CoVid has highlighted, it promises to be an interesting read.