The hard truth is that Britain’s entrepreneurs simply don’t innovate

Lord Sugar, the founder of the IT firm Amstrad and the star of The Apprentice, made most of his fortune in property. Photograph: Sarah Lee/The Observer

Entrepreneurs are a false god. We offer them billions of pounds’ worth of tax breaks and subsidies, and a lot of goodwill, when research suggests that most, after pocketing the cash, will do little to help UK plc prosper.

Academic studies have found that small business owners, while being a significant slice of the economy and a source of employment, are very rarely the spur for innovation or increases in productivity, let alone the wellbeing of the workers under their employ (health and safety is worse in small businesses).

If you want innovation and creativity, big companies with expertise to spare are a better bet – or the kind of startups that thrive, like arm’s-length subsidiaries, shielded by the umbrella of a university or private equity firm.

These are companies worthy of targeted state support. On the other hand, the idea of the entrepreneur as wealth generator par excellence is at best unproven and at worst entirely misplaced.

It is important to pay attention to the academic literature, because entrepreneurship underpins the neoliberal narrative that has dominated politics for the past 40 years and still forms the bedrock of mainstream economic thought. Without any supporting empirical evidence, this belief has meant almost every entrepreneur getting a handout in the desperate hope that they might build a Microsoft or Amazon.

At the start of 2023 there were 1.4m small businesses (those with 1 to 49 employees) and 36,900 medium-sized businesses in the UK (those with 50 to 249 employees). Last month, the National Audit Office (NAO) identified 39 reliefs aimed at increasing business investment. The bill for 29 – most of them aimed at small and medium-sized businesses (SMEs) – was estimated at £16.6bn.

What bang did the government get for its buck? The NAO said: “The Treasury and HMRC do not ­monitor or evaluate reliefs closely enough to understand if they cost too much or achieve their intended economic impacts.”

Entrepreneurs’ relief costs about £3bn a year, and aims to encourage people to start or join growing companies, by lowering the rate of capital gains tax they pay when selling the company. A review in 2019 by Adam Corlett at the Resolution Foundation came to a similar conclusion as the NAO: it is possible to see that 52,000 people claimed the relief in 2015-16, with an average gain of £75,000 per person, but not whether their businesses were hi-tech startups or restaurant chains.

Other tax reliefs for business are available, enterprise zones among them, where there is almost no understanding of the benefit of such colossally expensive state gifts.

Paul Nightingale, a professor of strategy at Sussex University, says the UK is not alone. Most ­governments have failed to provide a rigorous analysis of the impact that SMEs have on economic productivity and growth.

Politicians are hard-wired to believe that profound creativity only happens in the garden shed of a genius

Nightingale wrote a paper with Alex Coad, a professor at the Waseda Business School in Tokyo, that divided SMEs into “gazelles” and “muppets” (marginal undersized poor performance enterprises).

“Muppets” might seem harsh, but the former Bank of England economist, Andy Haldane, a member of the Treasury’s economic advisory council, was even less flattering when he called them “zombies”.

“Despite an almost universally accepted belief outside academia that entrepreneurial activity is a positive driving force in the economy, the accumulated evidence remains largely inconclusive,” the academics say. “A small proportion of high-performing firms drive the majority of innovation, wealth creation and new job generation, while most firms, including the median small business and the median startup, have only a marginal impact.”

The economist most closely tied with the narrative that small firms can be creative, innovative and disruptive is Joseph Schumpeter, while the free-market evangelist Friedrich Hayek was credited by Ronald Reagan’s advisers and Margaret Thatcher as a touchstone. Coad says their positions are almost religious, in that they are faith-based rather than relying on evidence.

Mariana Mazzucato, an economics professor at University College London, attacks the issue from a different angle. Her book on industrial policy, Public Purpose, shows most “gazelles” are fostered by the state – and not through indiscriminate subsidies, but consistent and persistent support from state agencies.

Rather than weighing down a dynamic private sector, public investments have been behind many of the greatest innovations of our time, she argues. Yet politicians are hard-wired to believe profound creativity only happens in the garden shed of a genius entrepreneur.

Now we must put up with Alan Sugar, star of the The Apprentice – the 18th series of which is now showing on BBC One – showcasing people we are told will enhance the UK’s economic potential.

As a young entrepreneur, Lord Sugar created the Amstrad line of computers, built from pre-assembled components into machines that ultimately became a footnote in the history of IT. However, he made most of his fortune – like so many British businesspeople – from property. No doubt most of his proteges will go down the same route.

In the budget next month, Jeremy Hunt will laud entrepreneurs, and Labour will do the same. Before they do, a bit of evidence for their cheerleading would be nice.