INDUSTRY EVOLUTION IN THE U.K. CONSULTING SECTOR

Andrea Mina
Centre for Business Research
University of Cambridge
Judge Business School Building
Trumpington StreetCambridge, CB2 1AG
Phone: +44 (0)1223 765330
am793@cam.ac.uk

Bruce Tether
Imperial College London
South Kensington Campus
London SW7 2AZ
United Kingdom
Phone: +44 (0)20 7594 9171
b.tether@imperial.ac.uk
Karl Wennberg
Imperial College London
South Kensington Campus
London SW7 2AZ
United Kingdom
Phone: +44 (0)20 7594 9171
k.wennberg@imperial.ac.uk

WORKING PAPER FOR SUBMISSION TO THE 2009 CAED CONFERENCE.
PLEASE DO NOT CITE OR QUOTE.

INDUSTRY EVOLUTION IN THE U.K. CONSULTING SECTOR

With the rise of the “service economy”, economists have begun exploring services and ofparticular interest to researchers in the last decade has been the explosive growth of
Knowledge-intensive business services (KIBS). In this project we present a detailed
longitudinal investigation of the UK engineering and design consulting sectors, an hitherto
underinvestigated part of the service sector (NESTA, 2006), but one that has been leading inindustry transformation (Mina, 2008). From the mid-1970s, employment in engineering
consultancy services has grown 2.3% yearly, with value added growing even more rapidly at
6.1% yearly. This growth exceeds that of any other produce service sectors except forcomputer services, and is more accentuated in the UK than in almost any other Europeancountry (Kox & Rubalcaba, 2007; Toivonen, 2004). Despite their growing economic
significance, our understanding of Professional Service Firms remains under-explored(NESTA, 2006). The need to develop understanding of these activities has become all themore pressing with the crisis in the financial sector, and the low likelihood that
manufacturing will grow substantially in real terms. Engineering and design consultancies are
considered to be of strategic significance as they are often at the leading edge of innovation
practices and - alongside universities and the wide public science base - play an systemic
important role in the development and diffusion of knowledge (Tether & Tajar, 2008).
A sizeable empirical literature on firm growth, exit and merger has developed in Industrial
Organization (IO) Economics. This research has shown that industrial evolution is very
heterogeneous across sectors, especially when it comes to services (Dosi, Gaffard, & Nesta,2008; Geroski & Mazzucato, 2001). Yet, extant research has informed us about thedifferential pattern of firm evolution: entry, growth, and exit. For entry, the establishedresearch has documented that there are several types of entrants or “births” of firms such as(i) de-novo firms founded by independent entrepreneurs or (ii) Spin-offs – firms that used to be adivision of an incumbent firm and subsequently achieved status as an independent entities,
albeit often still with legal and/or financial ties to the parent firm. These different types ofentrants have implications for the subsequent growth and survival of firms (Philips, 2001). In
terms of growth, small firms are often acquired by an incumbent firm or one of its offspring
due to a lack of resources to sustain further expansion, hence facilitating further expansion of
the firm (Granstrand & Sjölander, 1990). In terms of survival, small firms often merge withsimilar or complementary firms, especially when one of them is already a member of aformal company group or a group of collaborating firms (Ellis et al., 2008). Recent studies
also that especially for new service-intensive firms, exit need not constitute a faultline offailure but the dynamics of consulting firms frequently entails firms that disappear as
independent entities by merging or being acquired by larger firms (Phillips, 2001). For
example, Mamede, Mota and Godinho (2007) show that knowledge-based service firms
might have higher survival chances, and entry within such sectors are less responsive toincentives, highlighting the important role of engineering knowledge and inter-firm
collaborative activities for the evolution of engineering and design consultancies. In thisproject we aim to further this line of research by explicitly investigating the interrelations
between „contractor‟ firms and larger project leading firms.
In this project we study the UK engineering and design consultancy sector over an extended
period of time using a unique multi-level database assembled from the New Civil Engineer
magazine‟s survey of the industry since 1979. The database includes about 250 firms anddetailed information including their size, proportion of engineering staff, activities bydiscipline and region, plus financial information such as fees and profits. We combine thiswith aggregate industry level data from the UK Office for National Statistics. Ourinvestigation tracks how individual firms evolved over time, specifically addressing twointer-related research questions:•

What is the role of small vs. large firms in firm dynamics (exit and entry)?

•

What are the roles of R&D and market competition and for firm dynamics (exit andentry)

To address these research questions, our project entails both an exploratory empirical analysis
with aggregate sectorial descriptions, entry and exit rates among firms, as well as life-tables
for each firm showing the birth, expansion, and exit of firms (Yamaguchi, 1991). Our data
includes unique measures of engineering staff and project work within these firms to accountfor the interrelations between „contractor‟ firms (usually smaller) and larger project leading
firms. These variables are important because, as we argue in the below, one of the reasonsthat prior research has failed to document industry dynamics in Knowledge-Intensive Servicefirms involves the sometimes vague boundaries between “collaborating” firms and separate
firm entities. With these analyses we hope to shed light on an important yet under-researchedeconomic sector, and to present a number of empirical and theoretical contributions toresearch on industry evolution.

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