Why gazelles and giants both matter

 
Allister Heath
SHOULD you work for a big company or a small one? To me, the answer is simple: the smaller, nimbler and the more entrepreneurial the firm, the better. But as figures out yesterday demonstrate, there is a reason why many people would prefer to work for larger institutions. The top 100 firms in the UK employ just six per cent of the UK workforce – but they pay much higher wages on average.

The study out today from PricewaterhouseCoopers for a group of Britain’s top finance directors reveals other interesting facts. The average salary paid by Hundred Group members in 2010 was £46,550, considerably more than the UK national average wage in the same period of £25,900. There are plenty of good reasons for this. Productivity (the value of output per worker) is higher in big multinationals. There are, of course, myriad exceptions: small hedge funds pay well, for example. But large multinationals employ better educated, better trained and higher skilled people, on average, than smaller firms, and have better know-how. Tesco is a good example of this.

It is not just the top 100 firms, which last year handed over £56.8bn to HMRC, 11.9 per cent of the total tax take, that matter.?The top one per cent of all companies account for most wealth-creation. A good proxy of that is tax. According to a report out today from the Oxford University Centre for Business Taxation at Saïd Business School, the top one per cent pay 81 per cent of all corporation tax. And over the last 10 years, multinational companies have paid 86 per cent of all corporation tax.

This is not to say that small firms don’t matter: they are critical. But it is a small-minority of super-fast growth firms – the gazelles – that really make a difference. The vast majority of small businesses remain tiny all their lives – one man or one-woman operations. Nothing wrong with that: it allows people to earn a living on their own terms. But the growth-producing stars are the small minority of firms that eventually employ hundreds and even thousands of people, invent new ways of doing things, shake-up the established order and become new global multinationals, displacing older behemoths – the dinosaurs.

There are several lessons to be learnt. First, it is a myth that large firms don’t pay corporation tax: 15 per cent of profitable UK companies that are part of multinational groups pay no corporation tax, while 14 per cent of profitable UK companies that are not part of a multinational group pay no UK corporation tax. There is no real difference. Second, the UK needs to do more to attract large multinationals: this is key to the survival of many high-paying industries, from finance to car-making. Third, anybody can start up a new firm. What’s difficult is growth – and especially very fast and sustained growth that turns a start-up into a profitable, innovative success story with many employees. The government needs to stop making this process more difficult than it needs to be. High labour taxes, a poor and costly infrastructure, skills shortages, poor education and the constant threat of litigation are massive hurdles for wannabe gazelles.

So which kind of company would be the best employer for an ambitious individual – and the best hope for economic recovery? Either a large, powerful global multinational – or a young, nimble gazelle which aspires to be a great success story. Take your pick.

allister.heath@cityam.com
Follow me on Twitter: @allisterheath