Multinationals snuffing out some of Britain's most promising new companies

The research shows that the presence of multinationals on UK soil increases significantly the chances of an enterprising new business going bust in its first year.

Ordinarily around one in five new ventures dies within its first year and two in five fail to survive beyond three years. But in dynamic economic sectors — where companies compete on the innovation of their products or services — the likelihood of failure increases substantially as a result of competition from multinationals locating in Britain.

One of new Chancellor Alistair Darling's last initiatives as Secretary of State for Trade and Industry was to set up an action group to identify innovation and share the lessons of Britain's best new enterprises. At the same time the UK is still keen to encourage multinationals firms to locate here and has attracted more foreign direct investment than any other EU country.

GEP's Dr Holger Görg said: “Attracting foreign investment and encouraging enterprise are cornerstones of most governments' economic policy, but little research has been done on whether the two are mutually compatible. Our research raises some difficult questions.

“The chance to attract a big company and hundreds of jobs to the UK may make the demise of a new enterprise seem unimportant, but the impact could be enormous over the longer term.

“The companies being killed off are the Microsofts and Virgins of the future.

“The instant gain of employment and investment by a multinational locating in Britain could be outweighed by its potential to kill off a small start-up that in future could employ a greater number of people.”

Latest figures from UK Trade and Investment show that Britain attracted record levels of global investment last year, the fourth consecutive year the record has been broken. The UK is the largest recipient of foreign direct investment in Europe and second only to the US worldwide. According to GEP, in 1998, 12 per cent of UK employment was in foreign-owned multinational companies. By 2002, the last year of data, this share rose to 17 per cent — a 42 per cent increase over the period.

“This research could have public policy implications and may encourage the government to be more discriminating in terms of the types of multinationals it entices to come to the UK and the level of benefits and perks it offers different overseas companies looking to locate here. Alternatively the government may need to consider how it can support and encourage start-up enterprises that face competition from multinationals,” said Dr Görg.

This is the first in-depth analysis of the link between multinationals and the survival of start-up businesses in the host country. The research was based on data from over 179,000 start-up businesses in the service and manufacturing sectors between 1997 and 2002, compiled by the Inter-Departmental Business Register held at the Office for National Statistics.

Data was also drawn from the Inter-Departmental Business Register (IDBR) database at the UK Office for National Statistics This register captures VAT-registered businesses and covers about 98 per cent of UK business activity.