Digital economy ’40 per cent bigger than we thought’

The research uses a new method of measuring the digital footprint companies leave online, and claims to be a more accurate way of classifying businesses than the official standard industrial classification codes, which can lead to thousands of firms being wrongly identified.

The report by the National Institute for Economic and Social Research (NIESR) and London start-up Growth Intelligence suggests there are really 269,695 companies in the digital sector, compared to the 187,616 firms recognised by the government.

Basingstoke is the UK’s real Silicon Valley, according to the research, with the higher concentration of digital companies in Britain. But there are also important clusters in places like Aberdeen and Middlesbrough which are overlooked in the offical figures.

The study claims that improved classification of businesses means the digital economy accounts for more than 14 per cent of active companies in the UK, as opposed to 10 per cent on conventional estimates.

And switching measures increases the digital economy’s share of employment from around 5 per cent to 11 per cent of jobs.

On average, digital employers hire three more people – 15 per cent more – than those employers who are not digital.

The researchers also found that the revenue reported by digital companies is growing 25 per cent faster than their non-digital competitors. But digital companies still have lower average revenues than the rest of the economy.

Google‘s chief economist Hal Varian said: “This is a groundbreaking and important report by NIESR not just because it shows that the spread of the digital economy into other sectors is driving growth and jobs throughout the UK but because – for the first time in 65 years – it presents us with a new way of measuring the economy.”

The authors of the report said: “Britain’s outdated business classification system means that hundreds of thousands of these kinds of digital companies are incorrectly identified by government and financial institutions.

“With politicians, banks and insurers basing policy decisions on SIC codes, it means that thousands of firms could be missing vital support.”