Chris Lonsdale - The UK Equity Gap: The Failure of Government Policy Since 1945

The Failure of Governm ent Policy Since 1945

CHRIS LONSDALE

First published 1997 by Ashgate Publishing

Reissued 2018 by Routledge

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Copyright Chris Lonsdale 1997

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A record exists under LC control number: 97023058

ISBN 13: 978-1-138-36070-9 (hbk)

ISBN 13: 978-1-138-36072-3 (pbk)

ISBN 13: 978-0-429-43297-2 (ebk)

A great deal has been written about the existence of an equity gap in the UK in the 1990s, not least because of the abolition of the Business Expansion Scheme, the launch of the Enterprise Investment Scheme and the Venture Capital Trusts, and the development of the informal venture capital market. Furthermore, two years ago the Labour Party embraced the issue by announcing its intention to create a small business development bank should it be elected to government. The small business pages of the daily newspapers have regularly focused on the issue, as have the myriad of business journals in circulation. Whilst this attention is clearly to be welcomed, I have always retained the feeling that the new policy initiatives, future plans and the reams of business comment have not been based upon a systematic assessment of what has occured in this area in the past. In this study I have sought to provide just such an assessment.

Broadly speaking, there are three main contributions I have sought to make in this study, which charts the activity of government since the Second World War. Firstly, I have brought together the range of initiatives governments have put forward in this area and put them within a framework which allows a systematic assessment to be made. The framework I have used encompasses the alternative ways in which the state can intervene in the running of the economy. The policy approaches I have identified are direct state intervention, fiscal intervention, non-financial intervention and laissez-faire. When applied to this particular economic issue a number of characteristics of policy can be assigned to each position, characteristics which can be identified in the policies enacted in the real world. This allows the policy approaches to be assessed as well as the individual policies, an important attribute as individual policies often fail, not because the principle behind the policy was flawed, but because of its execution. The manner in which a policy is implemented is often the consequence of the conflicting interests of those in the policy process, a process which often takes the policy away from its original objectives, or introduces loopholes which cause unintended consequences. The intention in this study is to get beyond such distorting factors and understand the potential utility of the various approaches.

The second contribution of the study is an assessment of the four policy approaches. This is achieved through an analysis of the performance of the various policies enacted by governments over the past twenty years. The analysis, however, focuses upon the policies as policy approaches and assesses the influence of factors which are particular to them. In the case of fiscal intervention, for example, there are four cases which contribute to a conclusion about its potential to bridge the equity gap. The evidence presented on policy in the study has been restricted to the past twenty years or so, partly because it is in this period that the majority of the initiatives have been enacted, but mainly because of the need to gain access to information. The analysis primarily includes the National Enterprise Board, the Scottish Development Agency (now replaced by Scottish Enterprise), the Business Expansion Scheme, the Governments sponsorship of five Business Introduction Services, and the Governments laissez-faire approach to the UK institutional venture capital industry, although other policies are touched upon. In undertaking this assessment I have used three criteria: the effectiveness of the policies in raising finance; the effectiveness of the policies in targeting that finance at the equity gap; and the financial performance of the investments made / promoted by the policies. The use of these criteria allow the policies to be assessed with a greater degree of accuracy and objectivity than would otherwise be the case. The assessment has involved the bringing together of much of the statistical data available on venture capital in the UK. The presentation of this data is another aspect of the study which readers may find useful. The third and final contribution of the study comes in the form of a series of recommendations which I believe logically follow from the assessment of the various policy approaches. These recommendations, I believe, would improve the availability of equity finance for small firms without causing any significant disruption to the established interests. Indeed, the recommendations constitute evolution rather than revolution.