Invisible Businesses: The Characteristics of Home-Based Businesses in the UK

1. Invisible Businesses: The Characteristics of Home-Based Businesses in the UK Colin Mason* Hunter Centre for Entrepreneurship University of Strathclyde, Glasgow Presentation to the Centre for Knowledge, Innovation, Technology & Enterprise (KITE), Newcastle University, 5th March 2008 * In collaboration with Sara Carter and Stephen Tagg (University of Strathclyde)

2. 1. Introduction • The home is again becoming an important place for work: “the home itself is being reconfigured as a place that’s not a respite from work, but the central location for it” (Pink, 2001). • Much of the research on working from home adopts an employee focus: • Work-family boundaries and their negotiation • Managing at a distance • Employee well-being

3. continued • Much less attention has been given to the growth of home based businesses • yet “each week around 2000 people start a new business at home … the home is now the most popular location for start-up” (Enterprise Nation, 2006) • 69% of all new businesses in the US operate from home

4. continued • Home-based businesses and employees working from home share many common issues. • But also some fundamental differences: • Home based employees are linked to an organisation, are managed and have colleagues with whom they interact – HBB owners are potentially more socially isolated • Many home based employees only work for a proportion of their time at home • HBB owners may have more control over the hours they work – but may find it harder to create work-family boundaries • Some HBBs employ other people • HBB owners have more interaction with their local community – socially, information seeking, sales and purchasing • Need to make a conceptual distinction between home based businesses and employees who work from home.

5. 2. The significance of home based businesses • Commentators suggest that there has been a significant increase in the number of home-based businesses in recent years • Home based businesses may be the largest segment in the small business population: • 45% to 67% of US businesses operate from home • More than two-thirds of Australian businesses operate from home • “home-based businesses are now a critical part of the economy, particularly in rural areas and market towns” (Dwelly et al, 2006) • In most cases the home is permanent, rather than a temporary, location for the business • Dutch panel study: 87% of businesses started from home; only 26% had moved out of the home five years later: nearly two-thirds still located in the home • Firms leaving home likely to be for growth reasons – further emphasising the role of home as a business incubator for growth businesses

6. continued • Meaningful discussion and analysis of the HBB sector is thwarted by the lack of statistics and research • Not identified in official statistics, forcing reliance on imperfect surrogates • Survey research: ‘invisible population’, uncertainty of legal position creates fear of being identified and subject to regulation or tax • Research studies: tend to by household focused engaging with the broader home-based employment debates: e.g. home, family and gender issues • Very few academic studies of home based businesses: most studies are in the ‘grey’ literature

7. continued • The consequence is that views of HBBs are polarised around stereotypes: • The ‘dismissive’ view: HBBs seen as part-time, lifestyle/hobby, women-owned, no economic potential – therefore can be ignored by policy-makers • The ‘virtuous’ view – HBBs reduce local economic leakages, create to day-time life in communities, enable work-life balance to be achieved, environmentally friendly (less commuting), enables people who are tied to the home to be economically active (e.g. people with family caring responsibilities, disabled), better child-care, contributes to rural sustainability – therefore should be encouraged by policy-makers. • HBBs largely ignored in local authority economic development strategies • Can either stereotype be supported: are HBBs distinctive from other small businesses, and if so, in what ways? • Need for a much stronger evidence base

8. Research questions • What is the numerical significance of home based businesses? • What is the economic significance of home based businesses? • To what extent and in what ways are they distinctive from other types of SMEs?

9. 3. The growth of HBBs • Growth of HBBs part of a much wider change in the structure of employment – temps, permatemps, freelancers, interim managers, independent contractors, soloists, etc: Free Agent Nation (D. Pink, 2001). • The growing significance of HBBs is also deeply entwined with the revival of the small business sector over the past 25-30 years: • Cultural attitudes towards small businesses have become more positive • Baby boomers • Generation Y • Economic, social and cultural changes have opened up opportunities for small businesses • Sectoral change: the growth of the service economy – knowledge work and personal services – fewer barriers to entry • Growing affluence – decline of the mass market and growth of market segmentation • Cheap and powerful IT and other innovations (e.g. express parcel delivery, printing and copying) which have reduced economies of scale

10. continued • Some trends have specifically favoured the formation of HBBs • ICT – laptop computers and associated software, mobile phones and high speed internet access – means that “where there’s a signal there’s a workplace”. Knowledge based workers “have the tools to work from pretty much anywhere” and can collaborate with individuals and companies separated by geography to work on collaborative projects • Nature of many service based businesses is that they can be run as one person businesses from home (e.g. web site developers, on-line traders, consultants) • Flexible form of economic activity, enabling people to trade off income against quality of life – e.g. can combine economic activity with family needs (‘mompreneurs’); household strategy – corporate/SOHO • Reduces commuting-related stresses and expenses • For some people who are tied to the home, a HBB is the only way of generating a (second) household income which is needed by many families to maintain a decent standard of living

11. 4. Data sources • Responses to the autumn 2005 survey of the membership of the Federation of Small Businesses (Carter, S, Mason, C and Tagg, S (2006) Lifting The Barriers to Growth in UK Small Businesses (4th biennial survey) • Largest business survey in the UK: 170,000 questionnaires sent out, 11.2% response rate • Respondents fairly representative of the VAT-registered business population

12. 5. Definitional issues • What is a home-based business? • “Any business entity engaged in selling products or services into the market operated by a self-employed person, with or without employees, that uses residential property as a base from which they run their operation.” • Includes two main types of business • Where the work occurs in the home (e.g. web designer, pottery maker) • Where work occurs away from the home but home is the administrative base (e.g. plumber, mobile hairdresser) • Also captures other forms of HBBs normally excluded from definitions • Contractors and agency workers • Farm-based businesses

13. continued • Our data cannot address these subtleties: HBBs defined as those respondents ticking the ‘home’ box in response to the question: “from what type of premises do you operate your business?” • Further limitation: the broad-ranging nature of the FSB survey means that it is not possible to explore any issue in depth. Only three specific questions about HBBs. • Main value of the survey, given its size and the range of topics covered is that it enables a comprehensive comparison of HBBs and the remainder of the small business population

14. 6. The significance of HBBs • Over one-third of respondents operate from home (36%) – the most important single category. • Retail premises (21%) • Factory, workshop, business unit (19%) • Office (18%) • Majority operate from exclusive space within the home: • Room exclusively for business (48%) • Attached or external premises (e.g. hut) (16%) • Extension (6%)

15. continued • Challenging the part-time/marginal stereotype of HBBs • Only 13% of HBB owners work less than 30 hours (4%) • HBB owners are less likely to rely on the business as their only source of income (61% cf. 71%) • More likely to have income from other employment (9% cf. 4%) • More likely to have income from pension (13% cf. 6%) • BUT, nearly three-quarters of owners of HBBs work more than 40 hours a week (higher than reported in US studies)

16. continued • Home location is a deliberate choice. Reasons for operating from home: • ‘cost minimisation’ (65%), convenience (54%) or ‘nature of the business’ (44%) • Relatively few respondents living in premises attached to business premises • Lifestyle reasons only secondary importance: family (28%), commuting (24%) • Providing flexibility where to live is even less significant (16%) • In most cases home is seen as a permanent location: few respondents saw the home as an incubator from which they would leave for commercial premises once they got bigger (10%) • Only 12% of HBBs described their business as ‘accidental’ – hobby which grew • The majority of HBBS are serious economic undertakings

17. 7. The geography of HBBs • Distinctive geography: • Rural: 50% of HBBs in rural areas compared with 26% of other businesses • Regional: a South East and South West phenomenon. • May hint at a dual-population of HBBs with different sectoral composition: (i) accessible rural/semi-rural counties in south east and south west England; (ii) remoter rural areas – e.g. Highlands and Islands, NE Scotland, Cornwall, Lincolnshire • Major urban areas have the lowest proportion of HBBs • The proportion of HBBS is negatively associated with multiple deprivation

18. continued • Located in distinctive types of places: • Residential suburbs (43%) • farm/other property in rural areas (21%) • Village centres (18%) • But, only 4% are located in residential areas in inner cities

19. 8. Characteristics of HBBs • Distinctive industry sectors: relatively more common in: • Computing and Related activities (58%) • Business Services (54%) • Agriculture, Forestry and Fishing (48%) • Financial services (42%) • Transport (42) • Construction and Building-Related activities (16% cf. 11%) • Relatively less common in: • Motor trades (12%) • Retail (14%) • Manufacturing (17%) • More likely to be engaged in e-commerce, but only a small proportion of HBBs are reliant on the Internet for a majority of their sales: % of businesses generating >50% of sales: • Ebay 0.8% cf. 0.2% • Own website: 6.3% cf. 2.4% • On-line portal: 1.5% cf. 0.5% • 3rd party web sites: 1.5% cf. 0.7%

20. continued • Distinctive in terms of age • 29% less than 3 years old (cf. 21%) • But a significant minority of long-established HBBs (38% over 10 years old) • Distinctive in terms of size • 72% have annual sales of less than £100k (cf. 27%) • 48% have annual sales of less than £50k (cf. 13%) • Reflects: (i) part-time nature of many HBBs; (ii) lower cost base, (iii) right censoring problem • BUT: 10% of HBBs have annual sales in excess of £250k; 9% employ 10 or more people • More likely to be sole traders (46% cf. 26%); less likely to be limited companies (38% cf. 54%) • Less likely to be registered for VAT (61% cf. 85%)

21. continued • But many HBBs are ambitious to grow • 57% increased turnover in the previous year (same as for other SMEs) • more than half of HBBs want to grow their business (58% cf. 63%), but only 21% anticipated the need for new premises • However, growth is less likely to involve additional employees (64% expected to stay the same size in next two years, cf. 46%) • Home based businesses are not marginal or satisficing • 38% of HBB owners felt that their financial standing was worse than it would have been if they were not a business owner, cf. 36%) whereas 39% considered it to be better (cf. 42%) • 55% of HBB owners felt that their quality of life was better than it would have been if they were not a business owner, cf 45% • HBBs more likely to have been started from scratch (88% cf. 70%) • HBBs more likely to be co-owned (90% cf. 80%) and co-managed with a spouse

22. 9. The Characteristics of the Owners of HBBs • HBB as an option for people otherwise excluded • Disabled (2.1% cf. 1.4%) • HBB owners marginally more likely to have been unemployed, housewife, retired or long-term sick immediately before starting their business: perhaps the only way that such people could become economically active? • HBB business owners better educated – consistent with sectoral bias to knowledge based sectors • 34% of HBB owners have a degree, cf 26% • 30% of HBB owners have a professional qualification (cf. 25%)

23. continued • HBB owners have less business ownership experience: • 30% have been business owners for five years or less (cf. 21%) • 52% have been business owners for over 10 years (cf. 52%) • HBBs marginally less likely to be portfolio or serial entrepreneurs • But HBBs not significantly older • 7% under 35 (cf. 6%) • 54% 35-54 (cf. 57%) • 39% 55+ (36%) • So, HBBs not a pre-retirement cohort nor a means of working beyond retirement age • HBB owners more likely to have worked for longer before starting their business • 68% worked over 10 years (cf. 60%) • Distinctive in terms of gender of ownership: • 14% 100% female-owned (cf. 10%) • Most are male owned (44%) or equal male-female owned (33%) • Other studies suggest there are differences in ages, motivations and expectations and male and female HBB owners

24. 10 Under the radar? • HBBs thought to be uncertain of their legal position and confused about which regulations apply to them • Evidence that HBBs are less likely to be regulated • 20% regarded issues associated with regulation as ‘not relevant’ (> 2 times other small firms) • Proportions of HBB owners reporting ‘dissatisfaction’ with aspects of legislation were lower • But HBBs marginally more likely to seek advice from government funded and other official advisory bodies, but proportions were very low.

25. 11. Conclusion • Dualistic thinking has characterised thinking about home • Home has always partly been a workplace (both waged and unwaged) and a place of commerce (‘party plans’) • In midst of a revival of home based working – growth in HBBs likely to continue (Phillips, EDQ 2002): • Demographics: (i) Ageing population, longer working life, distinct semi-retirement phase (ii) Gen Y – entrepreneurial, digital focus • Increasing costs of commuting and increased congestion, carbon taxes • Price of technology continuing to fall; power continuing to increase – new opportunities • Growing potential market that can be reached from home; more digital products and services • Need for/desire for supplementary incomes

26. Continued • Challenge to simple stereotypes that dismiss HBBs as part-time, small, economically marginal • Some fit this characterisation • Majority of HBBs employ other people • Over half have turnovers in excess of £50,000 pa • About 10% of HBBs have achieved a significant degree of scale • Simple stereotypes undermined by the heterogeneity of HBBs: size, sector, involvement with e-commerce, entrepreneurial characteristics, home-location or home-based, part-time vs. full time, ‘serious vs. lifestyle. Can’t generalise.

27. 12. Implications • Implications for the housing market • people are choosing houses with a view to starting/running a business • Effect of nature of housing stock (e.g. high-rise flats, tenements) and ownership (owner-occupation vs. social housing) on ability to operate HBBs: barrier to revitalisation of socially deprived areas within cities? • Creation of new property category: ‘live-work’ spaces • HBBs need to leverage external resources – increases social and economic activity locally • Complementary business services – e.g. copy shops, office supply shops, overnight delivery services • Informal meeting spaces (“Starbucks as the new entrepreneurial office”) • Need for formal meeting space, business support facilities, co-working space, ‘head down’ space – being met by property developers • Social spaces to congregate with other people to counter time spent in isolation

28. continued • Legislation and regulation are lagging behind changes in the nature and location of work – applicability of tax regimes (e.g. CGT, business rates), planning issues, municipality by-laws, regulatory issues to HBBs often unclear – creates huge uncertainty for HBBs encouraging them to stay ‘under the radar’ • Difficult to deliver business support • Hard for regulator to enforce regulations • Out of sight means HBBs are at risk to being ignored by policy-makers

29. continued • Government and LAs need to accept HBBs as a legitimate form of economic activity and one that is distinctive and economically significant • Perception that LAs are opposed to HBBs • Should make it a focus for local economic development policy • Implications for how home is theorised as it becomes not just a place of work but a place of business