Mid-sized companies to invest heavily in innovation

Moreover, this will also boost the broader economy, as 41 per cent of midcaps expect this sector to drive UK growth by 2012, with 33 per cent citing a major role in job creation.

Commenting on the findings, Bob Forsyth, Head of Strategic Growth Markets, UK & Ireland, at Ernst & Young, said: "It is clear that UK mid-sized businesses are a hotbed of innovation and enterprise, and a driving force for economic growth. These are not lumbering giants of industry or precarious fledglings feeling their way, but employment-creating, dynamic and ambitious organisations with their sights firmly set on growth."

Midcaps - an overlooked sector

Despite forming a powerhouse of economic growth, many midcaps feel overlooked or misunderstood by a political and regulatory environment that is polarised between large corporations and small businesses. One-third of this sector believes the regulatory environment - and 29 per cent believes that the the tax environment - will not be supportive of them in coming years. In addition, 28 per cent say a lack of understanding of mid-sized companies among politicians will hamper their growth under the coalition government and 23 per cent worry that the financial and investment climate will not help.

Asked what measures would most foster greater innovation among midcap businesses, 23 per cent cited a reduction in regulation and 14 per cent more tax breaks for investment in R&D, patent and licence applications, market research and technical training.

Writing in the report, Martin Jones, a regional winner of the Ernst & Young Entrepreneur Of The Year award, and who developed his small family-owned heating-maintenance firm PH Jones into a national multi-trade business employing over 1000 employees and turning over 80m a year, comments: "We are expected to compete with largecaps on the same level but without the resources that they have - and yet we are precluded from some of the advantages given to small businesses. We are caught between two stools."

Innovation

With greater resources than SMEs, midcaps' investment in innovation is significant. R&D, market research and technical training are earmarked for the highest spend in coming years at an estimated 12.8bn by 2012, closely followed by diversification and bringing new products or services to market (11.6bn) 3 and development of new, innovative and proprietary technology or prototypes (11.6bn). Consequently, seven out of ten midcap managers (69 per cent) view their company as innovative; 21 per cent rate their company as 'highly innovative.'

Midcaps' drive to grow extends into creating a culture of innovation among all staff, despite having large employee headcounts. Almost half (47 per cent) recruit highly skilled people and acquire knowledge from outside the business, while two fifths (41 per cent) encourage brainstorming, creative thinking and idea generation. One in six (16 per cent) employs a 'Head of Innovation' or similar.

Spirit of enterprise

Trouncing misconceptions that the spirit of enterprise resides solely within small businesses, 63 per cent of midcap respondents consider their company to be entrepreneurial (15 per cent say very entrepreneurial) despite only 13 per cent being owned or run by an entrepreneur or entrepreneurial senior management team.

Furthermore, the relatively large size of these firms is no barrier to speed and flexibility of action, both of which are traits widely ascribed almost exclusively to SMEs. The report reveals that midcaps adapt their business model to stay ahead in challenging economic conditions (59 per cent), maintain a clear vision for the future of the business (51 per cent), and act quickly to overcome challenges or obstacles (41 per cent).

While such nimbleness has helped midcaps negotiate the recent downturn, it has also left them in a strong position to maximise opportunities during the recovery; 17 per cent boast rapid growth plans.

International operations

Midcaps are also reaching well beyond the UK; 25 per cent invest heavily in entering new geographical territories, with 11bn in overseas investment planned over the next two years.

While 41 per cent of midcaps derive most of their profits from overseas markets, these are largely from the traditional territories of Western Europe (15 per cent) and North America (15 per cent), which suggests there is untapped potential for further investment - and growth - in territories such as Asia-Pacific (5 per cent) and the emerging markets.

Forsyth comments: "Expansion into foreign markets will be crucial for midcaps' continued growth. If the mantra during the downturn was innovate or die, the key theme for the recovery could be export or die. At the moment, foreign markets are largely untapped and those that are being explored tend to be the traditional trading territories.

"But if UK midcaps are to thrive globally, they will need a supportive government working in their interests - and those of the country as a whole - to ensure British business is globally competitive. UK mid-sized businesses feel they are being overlooked by government, business organisations and regulators. In testing times and with a new government at the helm, midcap firms deserve better recognition and support for their contribution to the UK and global economy."

Ernst & Young's Entrepreneur Of The Year programme celebrates those who are building and leading successful, growing and dynamic businesses. The Overall UK Entrepreneur Of The Year will be named at an award ceremony held in London on 18 October 2010.

* For the purposes of the research, 'midcap' was defined as a company with a turnover of 20million or more, and with 250 or more employees.