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Thousands of 'traditional' firms bunged into Blighty's tech economy by Google study

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There are at least 40 per cent more companies that make up the UK's "digital economy" than any Government estimates, and those companies tend to be considerably more successful than non-digital companies, researchers have found.

The study [43-page, 6.2MB PDF], commissioned by Google and produced by the National Institute for Economic and Social Research (NIESR), found that revenue growth at digital companies was 25% faster than that reported by non-digital companies. Digital companies also hired 15% more people than non-digital companies, it found.

NIESR used new data provided by software company Growth Intelligence to track the activity of companies on the internet, rather than using the classification system used by the Government. It said that "hundreds of thousands" of digital companies working in 'traditional' sectors such as architecture, publishing and engineering had been incorrectly identified by the Government, and could be missing out on "vital support" and investment as a result. Politicians, banks and insurers all based policy decisions on the Government's Standard Industrial Classification (SIC) codes, it said.

"Policymakers have identified the digital economy as one of the UK's key economic strengths," said the report's author, Dr Max Nathan of NIESR.

"That means they need to be aware of the true numbers of digital businesses around the country. The old image of tech businesses as start-ups that make no money is out of date too: using big data we show a broad array of active businesses selling digital products and services."

NIESR found that almost 270,000 UK companies, or 14.4% of all companies as of August 2012, could be classed as 'digital'. The SIC method defines only 167,000, or 10%, of businesses as 'digital'. According to NIESR, this is because SIC-based definitions of the digital economy miss out a large number of companies operating in business and domestic software, architectural activities, engineering and engineering-related scientific and technical consulting, among other sectors.

Using Growth Intelligence data also showed that the popular image of the digital economy being dominated by start-ups was incorrect, as digital companies tended to have a similar average age to non-digital companies. This was because digital platforms and tools had begun to spread into the wider economy and were being used in a greater number of sectors, the report said.

Switching SIC-based data to Growth Intelligence data substantially increased the number of workers employed by digital companies, from around 5% to 11% of jobs, NIESR said. Digital companies also showed higher average employment than non-digital companies when using the Growth Intelligence data, with the opposite being true when SIC-based data was used. However, not all companies surveyed reported their staffing levels, NIESR said.

Although London was the most popular location for digital companies regardless of which classification method was used, NIESR said that there were also "highly concentrated" levels of activity in regional areas including Basingstoke, Milton Keynes and Aberdeen. Manchester, Birmingham, Brighton and the South East of England featured highly in terms of raw firm counts, NIESR said.

Speaking at a launch event for the report, Business Secretary Vince Cable described the new measure as an "interesting alternative". "As our recently published Information Economy Strategy highlights, innovation, entrepreneurship and growth are spread throughout the UK," he said. "The information economy transforms every other business sector, driving productivity and creating new opportunities for growth."

Copyright © 2013, Out-Law.com

Out-Law.com is part of international law firm Pinsent Masons.

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