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Dr Neil Lee

Enterprise in deprived areas: Different problems or different firms?

Authors: Dr Neil Lee Dr Neil Lee

12 July 2012

Government policy often tries to target firms in deprived areas, and remove the barriers they face to success. The Local Enterprise Growth Initiative (LEGI), for example, tried to address barriers such as lack of skilled labour or access to finance in specific geographical area. Yet there has been little evidence to support this approach.

I try to address this in a new paper with Professor Marc Cowling of the University of Exeter. We test whether the firms themselves perceive different barriers to those not in deprived locations. The full version of the paper is here. And the results aren’t encouraging for policies like LEGI.

We test for nine barriers, including demand, cash flow, obtaining finance, recruiting and location itself. Only one – obtaining finance – is perceived to be a significant obstacle for firms in deprived areas. The rationale for policy focused on deprived areas is, we find, weak.

What’s happening? First of all, firms sort themselves into particular neighbourhoods on the basis of how much they value the locations. Firms which want cheap land or access to particular markets may move to deprived areas. Efforts to improve the physical environment of deprived areas may even be bad for these firms.

Alongside this, firms in deprived areas which find them difficult places to do business will simply not survive. The survey we use only consists of existing firms, for obvious reasons. While some firms will be in trouble but still be in our sample, most will not be the ones who face major difficulties.

Moreover, deprivation tends to be measured on the terms of residents, not the strength of the local economy. Some deprived areas (think of the City Fringe of London) may have deprived residents but be great places to be a firm: they are the parts of wider urban economies where those on low incomes live. We need to be careful of confusing deprived residents with a weak local economy.

For similar reasons, even if policy can improve enterprise in deprived areas, this is no guarantee that residents will take the jobs. Or that the jobs will be new: Work on Enterprise Zones, a similar policy, suggests than nearby firms move into the zones to take advantage of government support. (SERC at the LSE are finding similar results with LEGI).

Firms in deprived areas do not seem to face different barriers – instead, deprived areas have different firms. But there are still some problems to address: we find that access to finance is a particular problem (a focus of  one of the Merlin targets). Our results don’t suggest that all efforts to help firms in deprived areas are pointless, just that there may be better ways of doing it.

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