James Riley
December 6, 2017

Bursting out of the growth blocks

Policy

Bursting out of the growth blocks

Mark Cully: Fast growth companies are not restricted to startups, or to tech

Every year the Australian Financial Review publishes the Fast 100, a list of the fastest growing companies in Australia over the preceding three years. Top of the list in 2017 was TripADeal with an average annual growth rate of a prodigious 465 per cent.

To make the cut, the 100th fastest growing business grew at a more modest clip of 24 per cent, still fast enough for a company to roughly double in size in just three years.

The Fast 100 is a neat marketing gimmick, but as you need to self-nominate to get on the list, it misses out those fast growing companies who don’t need the publicity or are just too hard at work to fill in the form.

It turns out in any given year that there are more than 10,000 high-growth firms in Australia, based on estimates from the 2017 Australian Innovation System Report.

The precise number depends on the definition used. The definition we use is a business that grows (either its employment or its turnover) by 20 per cent or more for three years running.

We also exclude micro-businesses, those with fewer than 5 employees and annual turnover below $75,000, so as not to distort the results by including businesses that grow off a small base (e.g. from 1 to 4 employees over a three year period).

In total this leaves us with around 120,000 businesses each year from which the high-growth firm cohort is identified.

The number also depends on the state of the economy. It is higher in years when the economy is growing strongly, and lower in years when growth is weaker.

The proportion of high-growth firms declined between 2005 and 2014, coinciding with the trend slowdown in Australian GDP growth after the global financial crisis.

Why should we care about high-growth firms? Because these businesses propel much of the growth in the Australian economy. Between 2005 and 2012 just 9 per cent of businesses created 46 per cent of employment growth.

On the turnover side, 15 per cent of businesses created 66 per cent of sales growth and almost 70 per cent of value added.

These powerhouses are not just tech start-ups, they are found in all industries and all firm size groups. Large businesses were most impressive of all in their contribution. Here we saw about 500 businesses contribute 23 per cent of employment growth, and about 600 of them created 43 per cent of sales growth.

High-growth firms have higher labour productivity growth than their counterparts that don’t grow as fast, and they spend more on capital to expand their businesses.

The growth elixir

The report examines what drives such rapid business growth, confirming what we suspected: that there is a strong link between innovation and business growth. Firms that are innovation-active are more likely to grow their revenue and profits, and they’re more productive.

This association stands after controlling for a range of other factors, and we were also able to test and establish that the causality runs from innovation to growth.

Introducing a new product or a marketing innovation had the greatest impact on a firm’s revenue, boosting it by 3 and 4 percentage points, respectively, all else equal. And firms that had a strategic focus on innovation – those that really strove to innovate – also increased their revenue growth by 4 percentage points.

For high-growth firms these numbers were greater still. A focus on innovation as a business strategy increased their revenue growth by almost 10 percentage points, all else equal.

Similarly, businesses that spent a larger proportion of their revenue on R&D generated a larger return from that expenditure, while businesses that spent any money on R&D out-performed businesses that spent none.

How can we help create more high-growth firms?

For the first time in Australia we have been able to empirically estimate the number of high-growth firms and their contribution to the economy. Other countries have been doing similar work and come to broadly similar conclusions.

Given their outsized contribution to economic growth, it is only natural that governments are now turning to the question of how to promote more high-growth firms.

The answer is that it’s tricky. Since high-growth firms are found in all industries and all firm size groups, it’s hard to identify them ahead of their growth spurt. Data61 is developing new predictive analytical tools to see if we can learn more.

Even if high-growth firms are able to be identified – either predictively or in the midst of their high growth phase – it is uncommon for them to sustain high growth performance. After meeting the criteria to qualify as a high-growth firm, one year later numbers are halved and two years later only a third still qualify as high growth.

Several countries are beginning to experiment with policies that promote high-growth firms, and to assist them in maintaining their expansion. But there is not yet much evidence on whether these programs work.

What is likely to help most is an underlying environment that helps each and every business to maximise its growth potential. That means developing and increasing the skills and capabilities – most especially that of management – within the Australian workforce, embracing digital technologies, boosting competition, and ensuring ready access to finance and regulation that is more help than hindrance to expanding businesses.

Mark Cully is Chief Economist at the federal Department of Industry, Innovation and Science.

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