2.1 Our competitiveness depends on making the most of our distinctive and valuable assets, which competitors find hard to imitate. In a modern economy those distinctive assets are increasingly knowledge, skills and creativity rather than traditional factors such as land and other natural resources.

2.2 This process must be led by the private sector - the main wealth creator - by investment in new business development, research, information technology and skills. The Government has a critical part to play in building the capabilities the UK needs to compete by:

• strengthening Britain's capacity for innovation and risk-taking
• investing in the knowledge base, particularly in science and engineering
• improving the skills and capabilities of the workforce including by raising educational standards
• helping business make the most of information technology and research and development both at home and abroad.

Entrepreneurship and innovation

Why entrepreneurship and innovation matter
2.3 Entrepreneurship and innovation are central to the creative process in the economy and to promoting growth, increasing productivity and creating jobs. Entrepreneurs sense opportunities and take risks in the face of uncertainty to open new markets, design products and develop innovative processes. In the knowledge driven economy this process is even more critical, in small and large businesses alike. The Government already aims to ensure that we have the right macro-economic and fiscal climate to help people to develop entrepreneurial skills, and to remove barriers to growth. The pace of innovation means that competitive advantage has to be refreshed constantly. The UK needs more risk takers who can rapidly turn ideas into products and businesses.

2.4 The UK needs more high-growth businesses. As many people as possible should have the skills and support to set up, run and grow businesses - whether young or old, men or women and regardless of ethnic origin or where they live.

How does the UK stand?
2.5 The UK has more people who want to start a business than many other countries. We have talented entrepreneurs who have created world-class businesses. However, compared to the US, too few of these businesses achieve high growth. They lack a competitive edge and their founders often lack the ambition or capabilities to manage growth.

2.6 Too few people with innovative ideas and know- how come out of universities and large businesses to start growth businesses. New entrepreneurs face too many barriers. To spread a spirit of enterprise we have to remove:

• fiscal and cultural barriers which lead people to avoid or misjudge risk
• lack of access to the right finance for growth and the business skills to manage it
• regulations which impose excessive or unnecessary burdens on new business.

Entrepreneurial culture
2.7 The Government's aim is to create a broadly-based entrepreneurial culture, in which more people of all ages and backgrounds start their own business. In the US, entrepreneurship is widespread because entrepreneurs are highly regarded and well rewarded. In the UK, entrepreneurs are still too often viewed as mavericks.

2.8 Many factors contribute to an entrepreneurial culture and some will take time to turn around or are difficult for the Government to influence. One powerful lever that the Government does have is its fiscal policy which can increase the rewards of success.

2.9 The Government announced in the March 1998 Budget a package of tax reforms to encourage enterprise, including the introduction of the Capital Gains Tax taper and a new, more generous Enterprise Investment Scheme. The Government announced in the Pre-Budget Report(1) published in November that it would review how these measures can together encourage serial investments in smaller growing businesses. It will also review, for decision in the next Budget, the case for continuing with enhanced first year capital allowances, and other issues such as the effective rates of tax borne by small businesses.

2.10 Big business needs to become more entrepreneurial as well. Businesses are more likely to become entrepreneurial if their employees stand to share in the wealth they create. The Government is examining ways to encourage more employees to take a long-term stake in their businesses and to provide incentives for more high-calibre managers to join and stay with smaller, dynamic businesses. The Treasury is issuing a consultation document and conclusions will be announced in the 1999 Budget.

2.11 Other measures taken by the Government to contribute to improving the culture for enterprise will include:

• support for a review of the Queen's Awards for Industry, which will be looked at in the context of the Government's drive to promote entrepreneurship and innovation
• support for a National Campaign for Enterprise, to be led by the British Chambers of Commerce and aimed at everyone who could be a successful entrepreneur; this will build on the success of the Alan Sugar/Lloyds TSB tour to encourage enterprise among young people
• a joint conference in 1999 with the US Government and business people to share lessons on how enterprise can be promoted
• in Wales, to help strengthen the enterprise culture, a new Entrepreneurship Action Plan is being developed (see end of Chapter 3).

Tackling fear of failure
2.12 We are too afraid of failure. People worry that business failure will create a lasting stigma. Investors are too rarely willing to back those who have failed and want to try again. Fear of failure is lower in the US, where entrepreneurs who learn from their honest mistakes are more easily able to launch other ventures.

Entrepreneurship in education Micro Society is a twelve-week programme of work designed for primary pupils. It has been used in schools in South London for three years with good results. It develops an awareness of entrepreneurial skills by involving the children in creating their own society within the classroom. They set up the institutions required by that society: government, an economy, businesses, a civil service and a legal system. The programme has been adapted for use in British primary schools from an American programme called Mini-Society, developed by Dr Marilyn Kourilsky in Los Angeles.Businesspeople are recruited by the Merton Education Business Partnership to join Micro Society as visiting speakers at various stages of the programme. Speakers include a personnel manager, a local bank manager, a tax inspector and a politician. "I was very impressed with the interest of the children in the 'society'. The questions they asked were very perceptive and already it seemed that they were applying what I had told them to the next stage of their society's development. Micro Society is an excellent programme that seeks to introduce children to economic concepts at an early age - and it works! It deserves further support and to be widely used." Michael Bragger, Manager, Midland Bank plc.

2.13 Changing attitudes will take time. The Government can start this process by ensuring that a business in trouble has a fair chance to pull itself round and making sure that the law does not contribute to the stigma of failure. The Government proposes to:

• legislate for a stay on creditors' action to allow a business in difficulties up to three months to come to an arrangement with its creditors
• review arrangements for business rescues, and reassess the relative rights of creditors in insolvencies, including the costs and benefits of any changes to the Crown's preferential status
• consider whether our bankruptcy and insolvency laws need to be changed to ensure that they support enterprise, including whether any of the current restrictions on bankrupts could be eased.

2.14 These changes will not create a rogues' charter. On the contrary, the Government will legislate so that it can get quicker results against directors guilty of misconduct.

Developing entrepreneurs
2.15 Entrepreneurs often fail to realise the potential of their ideas because they lack the business skills they need. The Government has a part to play through the education system.

• It will enhance employability and develop key skills including entrepreneurial skills. The Department for Education and Employment (DfEE) is spending £15 million in 1998/99 to support links between education and business including business experience for school pupils and teachers.
• The Government has restored tax relief to businesses on the salaries of employees seconded to schools and other educational establishments.
• The DfEE is looking at ways in which schools can encourage the development of skills and attributes essential to entrepreneurship. The Qualifications and Curriculum Authority is considering how best to achieve this. A similar approach will be pursued in Scotland.
• The Government will pilot and expand the Young Enterprise Scheme into higher education, refocused to meet the needs of undergraduates. They will run their own businesses with a lecturer and two local small businesses acting as business advisors. The DTI is co-sponsoring this development with KPMG.
• It will fund up to eight new enterprise centres in universities to bring entrepreneurship training and business skills into the science and engineering curricula (see paragraph 2.42).

2.16 Links between education and business are being developed throughout the UK. In Scotland, business leaders have made a commitment to a programme of visits to schools, which was announced by the Chancellor of the Exchequer at the inaugural meeting of the Scottish Business Forum in April. The Scottish Office is investing £1 million in each of the next three years in a programme of industry and enterprise awareness for teachers and schools. The programme will be managed by the new National Centre: Education for Work and Enterprise at the University of Strathclyde. DTI, working with DfEE and other partners, will encourage:

• more businesses and schools to work together to support higher educational standards, especially in the teaching of work-related and entrepreneurial skills
• the development of learning and support materials, which will help teachers and pupils appreciate business needs and improve the relevance of education to tomorrow's job market.

How Business Links help smaller businesses Careersoft produces multi-media software for career education and guidance, including a new series of products, "Startup", which aims to encourage entrepreneurship among school leavers. The company have developed a "Digital Careers System" in which extra information about careers is signposted to sites on the Internet. Careersoft sought help from Business Link Calderdale and Kirklees to develop a management structure and skills base to ensure their future success. Together, they produced a new business plan and a training plan to improve employees' management and IT skills. The Business Link has also helped the company to develop and implement an improved corporate identity and design policy. This has already resulted in a 27 per cent increase in sales and five new jobs.

2.17 The Government will also address deficiencies in entrepreneurial skills through the business advice services provided through Business Link partnerships. It will make funds available to Business Links to support innovative start-ups with real growth potential, including one-to-one specialist help. The Government target is that at least 10,000 businesses a year will receive such support by 2001. This is in addition to the work Business Links already do with 8,500 different businesses each week. Independent research(2) has found that businesses which have received advice from Business Links have significantly increased their turnover, profits and export performance.

2.18 The Secretary of State for Scotland has recently set a target of 100,000 new companies to be established in Scotland over the next ten years and work is underway to review the Business Birthrate Strategy to improve business survival. In Wales, the Government is encouraging the creation of good quality new businesses under a New Business Starts Programme co-ordinated by Business Connect partners. This aims to help 1,000 new ventures start and grow in 1998/99, through the provision of key business skills.