Despite its relatively high labour costs, Germany is the world's largest goods exporter after China. Much of this success is attributed to the country's legion of small and medium-sized firms, known as the Mittelstand, that are renowned for their ability to innovate and generate growth.
These companies tend to focus on market niches, typically in traditional fields, such as mechanical engineering, rather than newer ones like software development. And their success in dominating global market niches, rather than merely domestic ones, is legendary.
Here at home, the CBI has now called on government to emulate Germany’s success by unlocking the potential of the UK’s own "forgotten army" of medium-sized UK employers, which generate 22% of the country’s revenue and 16% of its jobs. In a report published last month entitled Future Champions: unlocking growth in the UK’s medium-sized businesses, the business lobby group argues that these companies could play a vital role in rebalancing the economy.
The report points out that although companies with a turnover of between £10m and £100m represent less than 1% of businesses, they have the potential to inject between £20bn and £50bn into the economy by 2020. With bank lending conditions remaining tight, the report recommends that government should increase growth in this sector by providing access to new financing. These include opening up new UK bond markets to medium-sized businesses, more use of venture capital and making it easier for large companies to invest in medium ones.
However, the report notes that the contribution medium-sized firms make to the UK economy is much smaller than in France and Germany, where they contribute a greater share of total revenue. The main reason for this is that while some of these UK firms perform extremely well – the so-called ‘gazelles’ – others are lagging behind. Figures from thinktank the National Endowment for Science Technology and the Arts reveal that just 6% of medium-sized firms create 60% of all the new jobs created by the sector, while 65% create less than 1% employment growth. It pinpoints lack of confidence and ambition among these employers as barriers to expansion.
So it’s clear from the CBI’s report that as well as needing increased support from government, medium-sized businesses also need development strategies that focus on boosting growth. The success of Germany’s Mittelstand suggests that there are three main areas that their UK counterparts can usefully focus on to help emulate them. The first is to build on your traditional strengths in processes and markets you know well. The second is to recognise that niches that might appear tiny at first can produce huge global markets, so exploring and exploiting new avenues where others have limited expertise can yield significant dividends. The third is to harness the incremental benefits that constant product innovation can bring. Fortunately, developing skills, business development and continuous improvement are three areas where the BPIF has strong sector-specific expertise. We’re here to help you keep up with the gazelles.
Andrew Brown, public affairs advisor, BPIF