The 'Drag Effect' of SMEs in the West Midlands Economy: A Growth Framework for SMEs

This paper focuses on the enabling and hindering factors to West Midlands SMEs’ growth processes with the main objective of facilitating regional policy development on SMEs that drives growth whilst taking SME requirements into account. Based on a comprehensive analysis of key economic data on the West Midlands in the last twenty years, we identified that the West Midlands’ achieved an enormous catching up with its 1998 productivity levels in the last five years; however, a sustained SME low productivity in the region prevails (ONS 2018). We call this contradictory phenomenon of slower growth among SMEs within the context of a thriving overall regional economic growth as the ‘SME drag effect’ on the economy. The low productivity problem started with the 2008 Global Financial Crisis and while other countries managed to rectify it soon after the economic downturn (Pryce 2015), the UK could not. Therefore, there is a clear gap in our knowledge on the underlying causes of this SME drag effect, which can be addressed with a deeper and targeted investigation of SME development and growth. We address this gap by employing a holistic research model to capture the deficiencies in the SMEs’ growth process. Rather than a singular focus on particular drivers of the growth process, our theoretical approach to SME growth is built on understanding the interconnectedness between a wider range of issues that were previously treated in research as unrelated determinants of growth. More precisely, these are SME characteristics (e.g. age, size, sector), performance and planning (e.g. management and strategy, performance measures), external relations (e.g. markets and competition), added value (e.g. innovation, technology, CSR), and knowledge and resource management (e.g. HR management, training and development, finance and funding information advice and networks). This approach allows us to discuss the key areas that enable or hinder SME growth. Methodologically, we apply quantitative analysis methods to our data collected through our Promoting Sustainable Performance (PSP) Survey (Gilman and Salder, 2020) from March 2018 to March 2020, up until the Covid-19 pandemic hit. Using composite index methods, we combined three indicators of SME growth in employment, sales, and profits into one index and categorised our data as High Growth, Low Growth, Static and Decline SMEs. We first conduct a descriptive analysis based on chi-square tests of each variable in the key areas and then apply logistic regression to identify main factors that enable and/or hinder SME growth specific to each growth category. The descriptive analysis allows us to discuss our findings of regression analysis in detail. Overall we find that while high growth SMEs present almost all the key factors, low growth SMEs might adopt different approaches than high growth SMEs in some areas and still grow, indicating that there is no single pattern for SME growth. Static SMEs appear to be largely non-strategic and passive. Surprisingly, we identify unprecedented resemblances in the characteristics and practices of declining SMEs to high growth SMEs. Whether their strategy of replicating high growth SMEs is a result of performing so poorly or not, it does not yield similar results for the declining SMEs, requiring further research on this matter. As a result of these findings, we propose a framework for SME growth that focuses on three major shortcomings of SME growth. The framework stresses the need for instigating a change in mindsets in the management and employees to be able to develop a strong foundation for effective strategy development and planning within the firm and adopt digital technologies and skills to lift productivity and efficiency of the surviving SMEs. By the end of the Covid-19 pandemic, a new business environment will emerge that is shaped by the innovative minds of SMEs that have managed to survive, transition and grow. Therefore, our framework aims at providing an opportunity to the SMEs and local policymakers to start thinking differently about the growth of SMEs. This paper contributes to the academic literature with its holistic approach to SME growth, allowing us to produce research capable of more broadly informing practice, and its ability to identify the growth-related characteristics of four distinct categories of SMEs, allowing us to prescribe firm-specific policies in support of SME growth. Moreover, the fact that our data was collected in between two external shocks to the economy (i.e. the 2008 global recession and the Covid-19 pandemic) makes our findings more relevant for practice and policy considerations than ever. They shed light on the requirements of West Midlands SMEs in an economic environment that can be characterised as the recovery period in the aftermath of the global recession. Knowing those SME requirements immediately prior to the Covid-19 pandemic provides policymakers a meaningful insight to make more informed decisions