Iain Young: Support Scotland’s Mittelstand or kiss goodbye to faster GDP growth

Iain Young

The latest economic predictions for the growth of Scotland’s economy sit at around one per cent. This is lower than the rest of the UK and some other European nations, and there are many factors which may have an impact on Scotland’s economy over the foreseeable future.

From Brexit to a possible second independence referendum, and a lack of new entrants to the jobs market to an ageing population, it’s safe to say Scotland’s economy currently stands at a crossroads. If approached strategically, this crossroads is as much an opportunity for growth as it is a potential circle of decline.

The most successful economic growth in the last hundred years arguably emerged from the ruins of World War Two, in what was then called West Germany. The engine behind that growth wasn’t massive state-owned organisations, multi-layered conglomerates nor the gig economy: it was family-owned companies which focussed on manufacturing a small product range to a very high standard.

These businesses became known as the Mittelstand, defined by the FT as “an individual organisation or a type of specialist SME. It is essentially a family business, has a strong stakeholder commitment, and a focused product-service, usually in industrial sector niches”.
More than 99 per cent of all German firms now belong to the successful “German Mittelstand”. It contributes almost 52 per cent of the country’s total economic output and employs 60 per cent of all employees.

True to the definition of Mittelstand, almost all of Germany’s SMEs are family-owned, and many are managed by their owner. This drives a unique corporate culture with long-term survival and intergenerational transfer dominating short-term objectives. Profit is the result of attention paid to customers, and a focus on long-term mutual sustainability with key stakeholders leads to implicit “life-long” contracts.

In Scotland, the term “unicorn” has been coined for a high-value company that once started as an SME. We have seen the creation of companies such as Skyscanner and FanDuel, backed by Scottish entrepreneurs and angel investor syndicates, and at the same time, world-class educational institutions are churning out scores of graduates highly skilled in technology and innovation. These graduates aspire to become owner-managers so they can have a greater sense of control over their futures.

The future of world economic growth is increasingly going to be based on automation of tasks which currently require human intervention, and the appliances delivering that automation will need to be invented, refined, developed, manufactured, serviced, operated and ultimately recycled. Scotland is well-positioned for this future if it marries its contemporary skills in technology and innovation with its traditions in manufacturing and engineering.

While Scotland’s strength lies in its skills, if Scottish businesses also adapt to the type of long-term planning seen in Germany’s Mittelstand, the Scottish economy could enjoy long-term growth. If politicians turn away from short-term points scoring and support the development of a long-term, business-friendly structure, entrepreneurs and responsible business owners will be encouraged to provide a secure legacy of generations to come.

Iain Young is a partner at Morton Fraser