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Mat Bartram

Improving productivity by engaging small businesses

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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

Absorptive Capacity and Productivity

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This blog is based on: Harris, R. and J. Yan (2017) Absorptive Capacity: Definition, Measurement and Importance.

Professor Richard Harris is a Co-Investigator of the Productivity Insights Network

Government industrial policy often sets out to encourage firms with high levels of productivity to locate in geographic areas (or in industrial sectors) that are underperforming – for example, to aid rebalancing and to strengthen the resilience of such areas or sectors, as well as to provide new jobs. Examples include encouraging inward investment of foreign-owned multinational firms and facilitating the creation or strengthening of ‘clusters’ of co-located firms around a core of higher productivity firms (see the UK Government’s White Paper, 2017[1]).

Firms exhibiting higher productivity (such as multinationals) tend to spend more on R&D, and thus introduce new innovative products wanted by consumers, or new production processes which are more flexible and cost efficient. And they are more likely themselves to export into highly competitive markets (and thus need to be capable of doing so). The dynamic capabilities such firms have can potentially ‘spill over’ to other less productive firms if the latter are capable of assimilating into their business this new knowledge from the external environment in which they operate.  Engaging in cooperating or partnering with, and sharing information that is available from, suppliers, customers, competitors, or other specialised sources, is evidence that firms are involved in internalising new, external knowledge spilling over from more productive firms. Similarly, firms that introduce new business practices for organising procedures (e.g., business improvement methods) and/or new methods of organising work practices and/or new methods of organising external relationships and/or implementation of changes to marketing concepts or strategies, are also demonstrating their capability of being able to internalise new knowledge, methods and practices. Overall, the ability of firms to engage in such activities denotes their ‘absorptive capacity’; like the ability of an individual to learn, absorptive capacity (AC) is not just about firms being able to potentially benefit from spillovers but rather using knowledge from the external environment to improve their productivity. If a firm has a limited ability to learn, then new strategies or technology that spills over, and that can potentially help firms become more productive, are likely to have only limited impact. More generally, having too many firms with lower AC is also likely to be a major reason for lower productivity in general, as it is shown in Harris and Yan (2017) that the higher is absorptive capacity, the greater the likelihood that a firm will do R&D, innovate and export – with all three activities, key underlying drivers of a firm’s (and thus nation’s) long-run productivity.

Harris and Yan (op. cit.) have used nationally representative data for Britain (based on the governments’ Community Innovation Surveys for 2004-2014) to calculate the level of absorptive capacity for each firm; from this it is possible to look at which firms have higher levels of AC. Figure 1 summarises the results; it shows the cumulative distribution (i.e., from the lowest to the highest values) of absorptive capacity separately for firms with a range of different characteristics. Establishments located in the Greater South East of England (which covers the administrative regions of the South East, Eastern England, London and the South West) generally have higher absorptive capacity throughout (their distribution lies to the right of the distributions of other areas); followed by capital cities (London plus Cardiff and Edinburgh); and then other areas (excluding Leicester and Nottingham, which have the lowest levels of absorptive capacity).  The second panel shows that multinational firms are must better as well, especially establishments that belong to UK multinationals, followed by US-owned firms. Establishments employing graduates have significantly better absorptive capacity levels, as well as those that are relatively larger, innovators (product and/or process), those engaged in R&D, and to a lesser extent exporters.  Establishments involved in the chemicals, engineering and aircraft sectors perform the best, followed by other manufacturing, and other services (excluding retail, hotels and real estate). When taking account of other factors that determine a firm’s AC (such as its size, age and organisational status), the differences shown in Figure 1 remain statistically significant (i.e., they are not ‘explained away’ by other underlying firm level characteristics).

The main results obtained by Harris and Yan have important lessons for policymakers, especially in terms of whether encouraging more multinationals to locate in (underperforming areas of) the UK, and pursuing a ‘clusters’ policy, will improve productivity levels. Firms with high levels of AC do have higher productivity, but the majority of less productive firms (the ‘tail’ of underperforming businesses) are more likely to benefit from their presence only if they have sufficient capacity to absorb potential spillovers from co-location.

Figure 1: (Weighted) Absorptive capacity indices by various firm characteristics, Great Britain, 2004-2014

Source: Harris and Yan, 2017 (Table 1)

[1] https://www.gov.uk/government/publications/industrial-strategy-building-a-britain-fit-for-the-future.

The Puzzling Productivity Problem

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By Dr Tom Buckley , Lecturer in International Business Strategy at the University of Sheffield

Do you have a problem? Maybe you do, maybe you don’t. Perhaps you had a problem last week, that you managed to solve and so is no longer a problem this week. You may not have a problem today but you may have a problem that needs resolving tomorrow. The United Kingdom has a productivity problem. It is a problem the UK has had for quite some time and, to be sure, solving this problem is critical to the long-term economic health and prosperity of the country. It will not be easy; make no mistake – it is a really big problem.

In its most recent analysis of UK productivity the Office for National Statistics estimated that in 2016, labour productivity in the UK economy was approximately 16.3% below the average level of other G7 Economies. Over the decade, 2008 and 2017 Labour Productivity[1] grew at an average rate of 0.51% per annum in France and 0.74% per annum in Germany; while in the UK average annual growth was 0.19% (The Conference Board: 2018). Addressing the productivity problem was at the heart of the UK Government’s Industrial Strategy, whose stated aim was to set a path in order to improve productivity not only through putting the UK at the vanguard of high-tech and digital industries, industries, that will define the fourth industrial revolution but also – and just as importantly – through pledging to address the ‘long tail of lower productivity firms.’

How the government’s industrial strategy can address the lower productivity of firms in this long tail, specifically in the low-wage retail and hospitality industries was one of the two central themes of a one-day conference organised by the Joseph Rowntree Foundation. The second, and by no means less important, theme addressed how raising productivity could help improve the pay and welfare of workers in these two sectors. The dual aspects of the conference thus helped focus delegate’s minds on the fact that productivity is, in itself, not a goal. Rather it is a route to a goal. To actual people, productivity is not real value added per employee over a quarter; it is about finding happiness and satisfaction in the workplace, a sense of fulfilment in the job they are doing, being engaged with the organisation that employs them, and having meaningful relationships with co-workers and managers.

Who better then to have as the keynote speaker Lord Mark Price, the former managing director of Waitrose and deputy chairman of the John Lewis Partnership and, more recently, a former government minister of trade and investment? The combination of Lord Price’s commercial and policy expertise informed an authoritative consideration of why workplace happiness matters. In so doing Lord Price made a compelling 21st century case for Adam Smith’s concept of enlightened self-interest. The key idea: happier employees improve all aspects of a company’s performance.

It was on this basis that the first panel, which included the Joseph Rowntree Foundation Chief Economist, Ashwin Kumar; the Chief Executive of the British Retail Consortium Helen Dickinson and the Deputy General of the TUC Paul Nowak considered the practical difficulties of cracking the UK’s Productivity Puzzle. Reflecting their backgrounds each speaker elected to emphasise different aspects of the puzzle – the need for the diffusion of best management practice; the need for collaboration; the need for flexibility in order to retain talent; the need for a holistic understanding of productivity (social and environmental productivity, not just fiscal productivity); and giving voice to the workforce. In so doing a clear vision of where efforts needed to be directed in order to improve productivity emerged. The starting point has to be organisations (whether in the public or private sector) that are structured to allow talent to emerge. This talent needs to be embedded in systems that allow it to flourish. This talent needs to be developed through training, retaining and if necessary retraining. Practises need to be established that encourage flexibility and incentivise commitment; and have the ability to affect how the organisation grows. If this sounds all too idealistic and blue-sky, that is not a reflection of this being an unachievable objective. Rather, it is a symptom of how much British companies need to do in order to make this state of affairs a reality.

That this state of affairs is not unrealistic, wishful, thinking for an ideal, but has in fact been achieved by a number of UK companies was illustrated in the panel following the lunch break which consisted of speakers form a range of companies from LUSH cosmetics to the bakers Greggs. Although I am far more familiar with one of these company’s products than the other (I will let you decide which) the forward thinking nature of both companies, demonstrated that there are in no fact no limits to what British businesses can achieve.

Business though does not exist in a vacuum and the final panel of the conference considered what the role of local and national government in driving performance in the retail and hospitality sectors should be. As demonstrated in the previous panel, there are some fantastic British businesses operating in the retail and hospitality sector. The UK government needs to support such companies. If Government is serious about addressing the ‘long tail of lower productivity firms,’ then Government needs to listen to what the needs of these companies are, and take appropriate action. To act effectively though, Government also must be self-aware; it has to know what it can do but equally what it cannot do. Through acknowledging its limitations, Government can achieve the appropriate balance between being proactive and reactive which is critical if policy is to have a meaningful role in stimulating productivity growth. As the Chief Economist of the Confederation of British Industry, Rain Newton Smith, eloquently stated it is about long term commitment to projects and people; supporting learning throughout a person’s working lives, providing them with high quality homes and giving companies access to the skills and labour retail and hospitality industry need in the future.

So how now to solve the UK’s productivity problem? If there was a single prevailing idea that emerged from the conference it is that this problem cannot be solved a single, direct solution from a single source. As with any problem; a problem shared is a problem halved. What is necessary if the UK is to final solve its productivity challenge is a concerted effort from a cross section of society. Only together, in partnership, with joined up thinking and a recognition of the mutual interdependence of all aspects of the UK’s society and economy, will the puzzle be solved.

[1] Real output per hour worked