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

Colin Mason*Hunter Centre for EntrepreneurshipUniversity 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)

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

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

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.

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

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

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

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?

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

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

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

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

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

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%)

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)

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

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

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

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%

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%)

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

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%)

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

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.

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

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.

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

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

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