Improving productivity by engaging small businesses

Improving the productivity of the long tail in the UK requires the government and other stakeholders to rethink programmes that target and engage the right companies, as well as providing more holistic tailored support. Siloed support that tackles specific areas alone, such as management skills or digital adoption, is unlikely to maximise effectiveness.  A key area of research for the Productivity Insights Network is to explore the integration of different themes that underpin the productivity challenge in the UK, for instance how management practice, employee engagement, adoption of innovative ideas and place all interact.

Recent research has highlighted the long tail of “productivity laggards” in the UK.  Analysis from Andy Haldane, the Bank of England’s Chief Economist, showed that the UK business base is characterised by a small minority of productivity leaders and a long tail of laggards.  This long tail of low productivity firms has not been able to keep up with firms at the frontier and the gap has widened in recent years.

Policy-makers and business groups believe that this issue needs to be tackled in order to help address the productivity challenge in the UK.  The Industrial Strategy White Paper highlights the need to act. Moreover, Be the Business, the campaign organisation formed to tackle the UK’s longstanding productivity challenge, has recently committed to a series of actions to help businesses improve.

Bringing together the research experience of SQW with the practitioner expertise of our sister organisation, Oxford Innovation, we have identified a series of principles that must underpin the approach taken to confronting the challenge posed by the productivity laggards in our Viewpoint, Policies and Research to Solve the UK’s Productivity Puzzle.  We urge government, Be the Business and others to consider these principles in designing approaches to working with businesses to improve their productivity.  In brief the principles are as follows:

Target companies in the long tail of productivity laggards that have potential to improve. Recent business support programmes have tended to target companies that have asked for help and been identified as having high growth potential. But these programmes exclude many ‘long tail’ laggards with potential to improve, since generally these companies neither know they have such potential nor see themselves as needing help in realising it.

Holistically strengthen all the factors affecting their productivity. Our work shows us that a range of interrelated factors affect productivity improvements in individual SMEs, notably their leadership and management strengths, workforce skills and motivation, capacity to innovate, strategic use of digital technologies and access to finance. These factors are closely interrelated. For maximum effect, therefore, support for individual SMEs needs to address these factors holistically, taking their interrelationships into account.

Engage target companies using the right channels and incentives. Haldane comments that while many business leaders recognise low productivity as a general problem, they don’t see it as their problem to fix. That makes attracting SMEs to come forward for support and make the most of it a challenge. Our work indicates SME leaders respond best to offers of practical, tangible support that come through their familiar networks, rather than official channels. They also need a lot of consistent external help in trying to improve their productivity to get significant and lasting results.

Programmes that adopt these principles will improve the chances of success. They should also build in evaluation so that they can learn fast. For instance, engaging the target companies will be a key challenge. Programmes could experiment with different engagement mechanisms and messages and see which ones work best with different companies.

We also highlight, in our Viewpoint, the need to consider whether national and local policies could complement each other more.  To take innovation policy as a case in point, it is important to distinguish between different forms of innovation, such as new-to-market or new-to-firm innovation, and between innovation at the technology frontier and the diffusion of innovation within the frontier.  This distinction matters for policy, because the balance between the frontier/new-to-market innovation and diffusion/new-to-firm innovation affects the distribution of benefits from innovation across the business base.

Whilst innovating at the frontier is important, potentially more important to improving the productivity of laggards is the diffusion through new-to-firm innovations that help ensure that more companies are adopting new practices or imitating higher value products and services.  Current policy, however, focuses on the cutting edge and new-to-market innovations, partly on the assumption that these will be diffused through supply chains or through knowledge networks.  A key question is what types of interventions could help innovations diffuse faster.  Part of the answer may lie in regional programmes.  ERC research has found that regional innovation support is important for process and organisational innovation; whereas national innovation support is important for product or service innovation.  So, striking a balance between national and regional/local support for innovation may be important in supporting diffusion of innovation, which in turn could help the long tail of productivity laggards.

 

By Jonathan Cook, Director at SQW and Co-Investigator of the Productivity Insights Network