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Exploratory Team Report on High-Growth Innovative SMEs

Exploratory Team Report on High-Growth Innovative SMEs

ong>Exploratoryong> ong>Teamong> ong>Reportong> on High-Growth Innovative SMEsPage: 4 of 31Being able to sustain rapid growth and high performance depends on many factors, such as business strategy,internal resources and know-how, leadership and management practices but it is also tied to macro-economic andframework conditions such as labor and capital market efficiency, the presence of a stock market where businessescan find funding, a tax system that does not penalize business development and conditions for protecting intellectualproperty and innovation. Establishing a growth-friendly climate implies inducing firms to innovate and invest,spurring business creation and simplifying business/administration relations.Rapid growth, although highly desirable, implies higher risk and produces dramatic changes in the scale and scopeof a firm’s activities. High-growth ventures often stumble because they cannot adapt to the pressures and demandsof these changes. Potential problems include: instant size, which produces urgent need of new workforce and gapsin the skills and systems required to manage growth; the internal turmoil associated with the quick integration of newpeople into the organization; the need for extraordinary resources to meet the demands of rapid growth.Entrepreneurs in rapidly growing ventures often have difficulty determining what kinds of organizational changes ortransitions are needed because they face greater managerial complexity than entrepreneurs in firms that aregrowing more slowly (e.g. product lines and target markets increase faster than responsibility (or systems) can beassigned (or developed) for managing them).It is clear that major changes in systems, structures, and capabilities are required in order to cope with the increasedcomplexity that accompanies fast growth. Simply stated, high-growth enterprises formal structures and systems thatare in place to coordinate activities can rarely keep up with the rate of organizational growth. These firms need to beable to self-organize on a continuous basis in order to respond in real time to the change and unpredictability thataccompanies rapid increases in the scope and diversity of their activities. This rapid pace of growth and changemeans that there will always be a gap between the demands of the high-growth venture and the publicsupport structures and systems that are in place to manage and support its activities. The reality is that, in arapidly growing enterprise, something is always out of alignment. Entrepreneurs need to find ways to ensure thatorder can still emerge so that the venture does not spin out of control. Governments do not have better knowledgethan the individual entrepreneur of markets, technologies and projects. It is not government’s job to interfere inbusiness strategy but, instead, to act on growth-promoting factors and remove certain hindrances.Some considerations on high-growth SMEsHigh-growth enterprises are to be found among SMEs of every size and in every industry. This evidence ofconsiderable heterogeneity makes any kind of policy hard to formulate and implement. If the purpose is toencourage job creation, government action should not focus on size but should strike a balance amongmicro, small and medium-sized enterprises. In addition, even in “declining” sectors, some firms arevigorous and continue to create jobs. Public policies should accept that growth is common to a wide rangeof businesses.• High-growth entrepreneurial activity is said to be different. According to most literature, traditional SMEpolicy should be different from policies directed at high-growth entrepreneurial ventures. However, we haveto admit that measures addressed to the SMEs population also have an impact on gazelles.• The support needs of high-growth firms may be highly demanding. The volatile character, significantresource needs, and escalating organizational complexity of fast-growth firms means that they need highlysophisticated support. Quite often, the provision of a competence mix requires intimate understandingand widely established contacts in the relevant business sector, which is something public sectorsupport organizations-taken as stand-alone players- can rarely offer. In many cases, the contacts andbusiness acumen required have to come from private-sector operators, such as venture capitalists, bankers,experienced managers, and more experienced peers. Qualified support is particularly important duringthe more advanced stages of the venture growth process, but it is also important during the very earlystages of the innovation process, for validation purposes. At the same time, the discussion on the role ofpublic services in supporting growth lead to the acknowledgement that public services disturb the creation ofmore advanced private service. Therefore in some cases the support has shifted from direct serviceprovision to financial support for acquiring private services.PRO INNO Learning Platform – ong>Exploratoryong> ong>Teamong> ong>Reportong> 2006: High-Growth Innovative SMEs

ong>Exploratoryong> ong>Teamong> ong>Reportong> on High-Growth Innovative SMEsPage: 5 of 31• An important role of the policy- maker is to facilitate the development of appropriate externalities:business service infrastructure, legislative environment, appropriate social and cultural context andeasy access to administration. In fact, fast-growing firms show needs to be dealt with flexibly and quickly.Entrepreneurs are short on time and do not want to be standing in line waiting for bureaucratic processes totake their due course. Therefore, programs need to have sufficient duration to reach their objectives,ensure fast response and be flexible enough in addressing a broad range of specific technical needs.• Different models of public/private partnership are already key components of many innovation policy toolkits but they differ across countries due to economic, political, geographic reasons. Overall, balancingpublic/private partnership in service provision for the Gazelles is not easy, because possible overlaps andinsufficient synchronization may give rise to crowding and market distortion. On the other hand, the publicprivatepartnerships model is an important part of the answer to the gazelles challenge. Thesignificance of public/private interaction is qualitatively very important and a key question is whether andhow the public/private contribution to boosting Gazelles innovation could be further improved.After this introduction we can turn the attention to the following questions:1.1 What is the challenge / problem to be solved?As we have seen from the previous paragraphs, there is evidence of a new typology of enterprises that is receivingincreasing attention at European level: the high–growth innovative SMEs, often also called “gazelles”. As alreadymentioned, gazelles have become exemplary since they contribute to social wealth through the creation of newbusiness and jobs. These companies are said to provide high returns for investors, promote regional development,generate satisfaction for managers and employees, and play a great contribution to job creation.Therefore, the overall policy objective will be (i) to raise the number of high-growth innovative enterprises to createjobs and to contribute to economic prosperity throughout Europe and (ii) the creation of a favorable environment(framework conditions) for existing gazelles to further develop and grow.However, these tasks are far from being simple since high-growth innovative SMEs constitute a “special” type ofventure (please refer to the previous pages for a thorough description):First of all, there is still no commonly accepted definition of “fast” or “high-growth” and the adherence to a specificdefinition is mainly determined based upon the data available and the objectives pursued. Moreover, growth is not alinear process but, on the contrary, it follows irregular patterns with peaks and troughs, slow-downs and spurts ofspeed.The first challenge for policy makers is therefore the “identification and selection” of the recipients of the supportfrom public intervention. If public policies are to support high-growth innovative SMEs, first of all, they need to clearlyidentify them. There is also a methodological issue regarding the type of index/variables that should be used toselect the population of high-growth innovative firms.Secondly, rapid growth, although highly desirable, also implies high risk and produces dramatic changes in thescale and scope of a firm’s activities. High-growth ventures often stumble because they cannot adapt to thepressures and demands of these changes. In other words, in high-growth enterprises the formal structures andsystems that are in place to coordinate activities can rarely keep up with the rate of organizational growth. Inaddition, the rapid pace of growth and change implies that there will always be a temporal gap between thedemands of the high-growth venture and the responses given by the structures and systems that are in place tosupport them. Furthermore, the needs of high-growth firms may be highly demanding and they need to be dealt withflexibly and quickly.PRO INNO Learning Platform – ong>Exploratoryong> ong>Teamong> ong>Reportong> 2006: High-Growth Innovative SMEs

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