ISBE Director October Blog

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The UK Productivity Challenge – Entrepreneurs to the rescue?

The adage that the average German worker has produced as much by Thursday lunchtime as a British worker will produce all week encapsulates the current productivity challenge facing the UK economy. The challenge isn’t uniquely British, but has become particularly acute since the global financial crisis of ten years ago. There are two dimensions to the challenge. The first is the productivity gap – over a long period of time annual improvements in productivity have been much lower in the UK (and in the USA) than in other European economies. The second is the trend – productivity has flat-lined in the UK over the past 10 years, and as a result the economy has struggled to provide workers with improvements in their real wage levels.

Aside from the fundamental question of whether or not productivity is a useful metric in a growth-obsessed world, there is a very wide range of potential explanations for why productivity growth has all but evaporated. In order to try and get to the bottom of this the Economic and Social Research Council has recently commissioned a new Productivity Insights Network. This is an interdisciplinary team with expertise across economic analysis, as well as education and skills, health and well-being, transport and infrastructure, and business and enterprise. It involves a number of ISBE members, including myself.

There’s another adage that if you line up all the economists in the world, you will still not reach a conclusion. This has been never more true in respect of the productivity problem – the only point on which there is consensus is that there is no consensus on what is causing the problem (or even if the problem is a statistical anomaly arising from bad data). The work of the ESRC network so far has been to produce a number of evidence reviews, available now on-linein draft but to be published in final book form next year.

A recent McKinsey Global Institute reportalso provides a very comprehensive analysis, highlighting both issues of changing demand patterns and patterns of business investment and innovation, as well as “deep dives” into a number of key global business sectors. But the McKinsey analysis focuses very much on the significance of the big corporates and has relatively little to say about the importance of innovation and productivity in the small business sector. This is odd given the numerical importance of SMEs and the contribution of SMEs to total employment and output. The report also has little to say about why productivity performance appears to vary a great deal on a regional basis within a particular country.

My own experience is that SMEs vary enormously in their attitudes to innovation and growth, and in the leadership capacity of their owner-managers. This is something that UK policy officials and statisticians in BEIS and ONS are beginning to recognise and investigate, and is central to the recent UK Industrial Strategy. One focus has been on the potential importance of particular management practicesfor business performance, such as adopting clear KPIs, continuous improvement practices or having HR practices that promote and rewards employees on the basis of performance.

However, in the small and micro business context business performance is likely to be much more about the mind-sets and style of business owners, and the extent to which leadership skills can be deployed to enhance employee engagement and well-being. But this is a topic on which there is far less available evidence to draw.

We also need to know a lot more about what makes for a successful small business scale-up (sustained rapid growth once past start-up), as opposed the factors which contribute to improved start-up rates. The UK has a lack of start-ups which lead to scale-up, particularly away from London and the South East. The only consistent findingsare that scale-up firms tend to be led by early middle-aged, educated men, with little to do with the characteristics of the firms themselves.

The Productivity Insights Network team are keen to canvass for thoughts and evidence, and have project funding available to support innovative research ideas. I would argue that understanding the role of small business and entrepreneurship in contributing to high quality business growth is key to any understanding of economy-wide productivity. However at the moment there are many gaps in our knowledge – gaps that relate both to a lack a depth and integration in theoretical perspectives on small business development, and to limitations in the evidence base and the quality of data resources available to researchers.

Andrew Henley
Cardiff Business School and ISBE Board Member

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