The Role of Local Large Firms in the Performance of New Firm Start-Ups

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Martin Andersson

Professor of Industrial Economics
Blekinge Institute of Technology (BTH)
Karlskrona, Sweden

Policies to foster jobs, innovation and productivity typically set SMEs and start-ups centre stage. This is not surprising. On average, SMEs account for about 70 % of jobs and 50-60 % of value-added in the OECD area (OECD 2017).[1] Young firms and start-ups are also shown to create a significant fraction of new jobs and they often play an important role in driving innovation and experimentation with new technology and business models. Accordingly, SMEs and start-ups are often the main policy targets. Promoting SMEs to grow and scale-up and stimulating new entrepreneurial and innovative firms are high on the policy agenda in virtually every OECD country.

But even if SMEs and startups are a main policy target, it is important to avoid a too one-sided focus. The fact that young firms and startups are the most important in terms of e.g. direct net job creation, does not mean that other firms are unimportant. For example, the entrepreneurs that start and run these firms come from somewhere and may have gained their managerial skills, business knowledge or ideas while working in a large firm. Likewise, the local presence of established firms, such as Multinational Enterprises (MNEs), may be critical for SMEs to find people with the business experience or the knowledge of foreign markets that they need in order to expand and scale-up. Furthermore, many established large firms may be important customers for smaller firms as well as young firms. SMEs and startups do not emerge or operate in isolation but are part of an interacting system that includes large established firms. The industrial dynamics that drives innovation and productivity is in fact characterized by a significant interplay between large firms and new entrants as well as SMEs.[2]

As a case in point, we have analyzed the question of where new firms that survive and grow come from in the case of Sweden.[3] This is an issue of importance because new firms are highly heterogeneous and most firms exit shortly after they are founded or do not grow. Still, the positive effects of startups on the economy appear to be largely attributable to new firms that survive and grow.[4] Knowledge of from where such firms come helps our understanding of the relevant contextual factors in new firm formation that drive jobs and productivity. Our findings suggest that in Sweden, large established firms, in particular MNEs, are an important source of new successful firms. Furthermore, the dynamics of this process typically play out at the local level.

First, we document substantial differences in survival across types of new firms. The figure below distinguishes between five types of new firms. Spinoffs are new firms where the majority of employees come from the same parent firm. If the parent exited in the same year as the spin-off, the spin-off is classified as a pushed spin-off; otherwise it is classified as a pulled spin-off. Non-employed are new firms created by people that were unemployed prior starting their firm. Divestitures are large new firms assumed to be reorganizations of activities that previously took place at an incumbent firm. Other new firms is a residual category.

Source: Andersson and Klepper (2013).

What is clear from the figure is that pulled spinoffs systematically outperform all other types of new firms in terms of survival and that the pulled spin-offs stand out as the best performers; firms with all employees previously unemployed stand out as the worst performers; with pushed spin-offs and divestitures performing somewhat better than other new firms. Divestitures aside, spinoffs show the highest survival rates among all types of new firms.

Second, our econometric analyses further show that even after controlling for several characteristics of new firms, such as initial size, human capital, industry, we find that spinoffs still show significantly higher survival rates as well as employment growth. Another result is that spinoffs with large parents and that are MNEs also perform better, which may reflect the fact that MNEs in general have richer tangible and intangible resources that founders of spin-offs can draw upon.

In summary, our results for Sweden are highly supportive for the argument that “incumbent firms are natural training grounds for the next generation of entrepreneurs” (Klepper 2011, p. 145) and that “the breeding grounds for entrepreneurial firms are more likely to be other entrepreneurial firms” (Gompers et al. 2005, p. 612).

The data we used in these analyses also illustrate that the spinoff process is highly localized in space. The table below presents data on the fraction (in percent) of spinoffs in Sweden during the period 1993–2005 that locate in the same municipality and region as the parent firm. The original data are based on 15,103 spinoffs with two or more initial employees.

Fraction of spinoffs locating in the same municipality or region as the parent firm.

Same municipality as parent firm72%
Same region but not same municipality16%
Sum88%

As much as 72 percent of the spinoffs during the period located in the same municipality as the parent firm, and another 16 percent remained in the same labor market region although not in the same municipality. Thus, 88 percent of the spinoffs located in the same “home region” as the parent firm.

Taken together, these results suggest an important relationship between existing firms and business dynamics through entrepreneurship. Much empirical evidence speaks in favor of the argument that large resourceful firms, such as MNEs, may play a significant role in the local eco-system of entrepreneurship for example by (involuntarily) acting as “anchor-firms” that accumulate and train human capital in a region. Policies aiming to foster local productivity and job creation should recognize the indirect role that established firms play in the entrepreneurship process. A too narrow focus on SMEs alone misses much of what is crucial.

[1] https://www.oecd.org/mcm/documents/C-MIN-2017-8-EN.pdf
[2] https://link.springer.com/article/10.1007/s11187-018-0072-y
[3] https://academic.oup.com/icc/article/22/1/245/882366
[4] https://link.springer.com/article/10.1007/s00191-012-0301-5

Shovel ready, but for what?

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Whenever economic setbacks occur, from the closure of a small town manufacturing plant to an event on the scale of the Global Economic Crisis, the clarion call for more infrastructure investment to help stimulate recovery can be heard almost immediately. Business leaders inevitably announce that there is an “urgent need” for investment in whatever projects are deemed “shovel ready”, and politicians keen to have ribbons to cut are usually only too happy to oblige, budget permitting of course.

The snag is that the evidence base on the links between infrastructure investment and the economy is inconclusive, and it is far from clear how spending money on infrastructure actually improves economic performance in the real world. Whilst macroeconomic reviews claim links between the overall quantum of investment with growth at country level, finding evidence in the real economy, in real places and in real firms about the causal links that explain how such investment promotes better economic performance – by enhancing productivity for example – is usually much more difficult. Indeed, the last major independent review carried out for the UK government on the impacts of transport infrastructure on economic performance, that by the former Chief Executive of British Airways Sir Rod Eddington, set out quite unambiguously that in advanced industrialised countries with mature infrastructure systems, the potential for subsequent investment to achieve the often exaggerated claims for economic stimulus is much less than is commonly assumed.

Yet the a priori belief that infrastructure investment will lead to improvements in economic performance remains resilient. Consider the ways in which the High Speed 2 railway project is being sold to an often sceptical public; that it will ‘rebalance’ the economy between north and south. Leaving aside the rather obvious yet often wilfully ignored point that transport infrastructure is – sometimes literally – a two way street, and that economic activity can move in both directions as relative accessibility changes, the idea that any single project, however large, can make a substantive impact on an annual GDP shortfall measured in the tens of billions is fantastical. Much of the same wishful thinking can be discerned in the claims made for the criticality of high speed broadband: very high download speeds might help your choice of evening entertainment on Netflix download more quickly, but for many if not most businesses, a good enough speed to facilitate a website and/or electronic payments coupled with dependable service reliability is what is required.

Then there is the issue of whether we can measure the impacts of infrastructure investment properly in the first place. For decades, most of the value released by transport infrastructure improvements has been assumed to derive from improvements in travel times, underpinned by the assumption that travel time is completely lost to productive activity. Major schemes with substantial pricetags, and hence significant opportunity costs given the competition for scare public funds, have often been justified on the basis of some really quite small time savings, the impacts of which we don’t fully understand. For example, if a rail commuting journey is reduced from one hour to 45 minutes, how do the people that use the service every day react? Does that 15 minute saving translate into more work at the office and therefore more economic output for the economy? Does it make them more likely to be able to maintain their commute over the long term so that the labour market works more efficiently? Or do they just stay in bed 15 minutes longer in the morning? And even if they do just that, does their wellbeing improve enough as a result to make discernible differences to their health, so that they work more productively when in the office? The transformation of the travel experience by the almost universal adoption of the smart phone, so that people can either work whilst mobile or spend the time satisfying more social needs to keep in touch with others, adds a whole other dimension to the complex debate on travel time that researchers are actively exploring.

So, what should policy makers do when considering the role of infrastructure investment as part of government’s toolkit to improve the economy? The most important thing is perhaps to acknowledge openly the high level of uncertainty about the causal mechanisms linking infrastructure investment such that a range of options for action is thought through carefully. It is entirely possible for a coherent case for infrastructure investment, including the very largest schemes, to be constructed so long as proper efforts are made to understand its actual impacts in the places it occurs and on the people and firms it is supposed to support. So the next time the call for the shovels to be readied rings out, the question should be “yes, but for what purpose?”.

By Professor Iain Docherty, PIN Co-Investigator and Professor of Public Policy and Governance at the University of Glasgow

Photo credit (featured image): Jevanto Productions/Shutterstock.com

 

 

Delivering productivity the Labour way…?

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The Financing Investment report published by Labour on 20th June set out how the opposition would approach the conundrum that is the productivity puzzle in the UK. The persistence of sluggish productivity growth since the financial crisis is not going away, but is the answer in setting the Bank of England a productivity target?

Raising productivity growth is a priority of all political parties, not least because productivity is a proxy for wage-incomes and ultimately standards of living. Therefore, while a productivity growth target is admirable, it is questionable whether this should this be required of the Bank of England let alone whether it can it ever work. Moreover, in the last four decades the highly ambitious three percent annual target has never been achieved before, and is significantly above the 0.2% per year increase seen over the last decade which has left the UK c.20% below the pre-crisis productivity growth trend.

The rationale for Labour’s proposal is the perceived failure of the UK financial system that has fueled speculation in the property market at the cost of investment in other tradable technologies and sectors.  This is a well-rehearsed argument. While access to capital for growth has been highlighted as a critical issue experienced by UK firms, in the aftermath of the 2008 crisis, access to  low cost labour may also have contributed to the  propensity for firms to prioritise employment over the propensity to invest even though the costs of borrowing have been extremely low.

The Bank of England Governor, Mark Carney, has previously expressed concern over assuming responsibility for productivity in addition to the primary target of keeping inflation at 2 per cent. The elephant in the room is whether the Bank of England, regardless of the 3% goal, is actually genuinely able to influence productivity growth in this way. Using monetary policy instruments to stimulate investment is premised on the expectation that the monetary authorities can incentivize banks to lend and firms to innovate or invest in innovations to yield productivity gains. Yet, the evidence here is mixed, to say the least, and runs the risk of confusing and conflating different sets of objectives, at least in the minds of the public and politicians.

Productivity is driven by innovation and entrepreneurship and it is not in any way clear how the monetary authorities can influence these, other than maintaining stable prices and inflation expectations so that firms, investors and entrepreneurs are able to plan effectively. Moreover, assigning a productivity growth objective to the Bank of England then largely absolves the other economy ministries dealing with regulatory issues, competition policy, research and innovation, infrastructure, land use, the coordination of different investment policy arenas etc., from their own responsibilities.

On one hand the fresh thinking in these proposals is to be welcomed, while on the other hand the proposals from Labour raise many additional questions. Given the already over-centralised and top-down system of governance in the UK, the prospect that the productivity growth is managed by the central bank is somewhat ironic – even if Labour are proposing it move to Birmingham! Given the highly regional nature of the productivity puzzle in the UK, policy needs to be more sensitive to local needs and tough institutional and governance questions need to be asked.

Despite the shortcomings of successive Governments to jumpstart productivity growth, the Industrial Strategy with its emphasis on place represents a welcome focus. However, whether or not this will provide the basis to address the structural weaknesses that are manifest in the long tail of low productivity firms and the enormous interregional productivity differences remains the subject of ongoing debate.

By Professors Tim Vorley and Philip McCann

Photo credit: PeterRoe/Pixabay.com

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.

Thoughts from our Advisory Board Chair, Lord Jim O’Neill

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I am delighted to Chair the International Advisory Board of the ESRC-funded Productivity Insights Network led by the University of Sheffield. This programme of research and engagement is an important initiative in changing the tone of the productivity debate. Raising productivity is arguably the central economic challenge in the UK, but to achieve this we need to better understand the drivers and inhibitors of productivity.

There are many different factors that influence productivity, ranging from skills, infrastructure, technology, migration, trade, and international investment as well as the regulatory and institutional environment. Each of these factors interact with each other in different ways to influence productivity growth. Over the next three years the Productivity Insights Network will unpack these factors, how they interact and play out spatially across the UK.

The complexity of the productivity puzzle is complicated further by the question of measuring productivity, especially in some knowledge-intensive sectors where information and communications technologies dominate. Yet, exactly how all of these factors and influences interact to drive productivity is not well understood. While we are able to measure productivity growth with a reasonably high degree of accuracy, we are still unsure about many of the mechanisms underpinning this growth.

Over recent years the role played by cities and regions in fostering productivity growth has also become a major focus of research and policy-thinking. International evidence suggests that the performance of countries depends crucially on the productivity growth of the country’s cities. Countries demonstrating productivity growth have typically seen strong growth in their core cities.

In the UK many of our great cities had been underperforming economically for decades, and only recently have some of these cities started to display an economic turnaround. Many of our great urban areas are very close to each other geographically, but this is not the case in terms of their connectivity, coordination and cooperation. These shortcomings have contributed to the underperformance of the UK economy, and overcoming these failures was central to the policy-agenda I led while I was at HM Treasury.

There have been some major institutional changes associated with the City-Region agenda which I spearheaded, all of which are aimed at helping cities to drive productivity growth. Achieving better local governance and decision-making capabilities is critical, both within and between our cities. There is a clear link between the devolution agenda and the productivity agenda, of which both portfolios were part of my ministerial brief.

The Productivity Insights Network puts these questions squarely on the table to advance insights on the productivity debate from a social science perspective. The UK still faces some of the largest interregional productivity variations in the industrialised world, with local area productivity differences akin to those across the whole of the Eurozone. The place-based framework adopted by the Productivity Insights Network provides a lens through which the productivity puzzle can be examined, interpreted and addressed.

Alongside the academic expertise the Productivity Insights Network is committed to engaging with government, the private sector, and civil society to diffuse evidence and insights about productivity. Serving as more than a focal point for advancing, connecting, integrating and synthesising ideas, there is a commitment to ensuring the research makes a difference by developing actionable insights with a view to raise productivity.

These are challenging times, and the Productivity Insights Network is an exciting initiative aimed at providing answers to some of our greatest societal challenges. I wish the network every success and I look forward to being part of these fascinating discussions over the coming years.

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

Productivity: Why you really should care…

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News about the stagnant levels of productivity growth in the UK are increasingly common. Certainly, the Bank of England and the Government are preoccupied with the so-called ‘productivity puzzle’, with productivity slowdown in the UK more severe than in other advanced economies. At the same time, and despite these recurring headlines, very few businesses seem particularly concerned with the issues of productivity.

So what is productivity and why does it matter?

In simplest terms, productivity is a measure of the value produced per hour by the average worker – in essence, productivity reflects how smartly we work. Labour productivity is one of the most widely used measures of economic performance, with higher levels of productivity relating to higher levels of output per unit of labour. Productivity growth, therefore, is the ability to generate more output from the same levels of input. While productivity is not easy to measure, it is still the best overall index of living standards and prosperity.

The UK faces different problems to most other advanced economies because of its economic geography, with some of the widest variations in productivity between regions and cities any country globally. Perhaps predictably, levels of productivity are more than 70 per cent above the UK average in London whereas less than 200 miles away in Wales productivity is only 70 per cent of the UK average.

Analysis from the Office of National Statistics has previously found levels of productivity in Sheffield (South Yorkshire) to be the lowest of the 13 largest city regions in the UK, which is particularly interesting given the devolution of power as discussed in the previous issue. For Sheffield and the City region the challenge of raising levels of productivity is very real, and demands a targeted approach to address weak levels of productivity in the region. In short, we need to raise the productivity of the Sheffield City Region if it is to deliver growth as part of the Northern Powerhouse.

Making Sheffield smarter

Most SMEs are concerned with profitability and occasional business growth, and while not the same as productivity, the issues are related. The productivity puzzle is complex and multi-faceted, shaped by factors such as investment and technology to skills, work and wellbeing, although exactly how these factors affect productivity is still an open question. In the Sheffield City Region  making SMEs smarter is a particularly important piece of the puzzle in raising productivity.

SMEs tend to be less productive than their larger counter parts, although there is often scope to be more productive. The challenge is often in identifying what steps can made and then how to best go about implementing them. The starting points for many SMEs is a process of self-reflection, and can start with reviewing operational processes; ensuring that employee both are appropriately skilled and deployed; making sure that the technology and tools are right for the business; and that recognising the management and leadership team in setting the vision and ambition of the business.

It is often the case that many SMEs are so absorbed by doing business that they do not have the time to embark on the business planning to ensure their future competitiveness – but this is time well spent. The newly established national Productivity Insights Network, led by Sheffield University Management School is funded by the Economic and Social Research Council to change the tone of debate, by identifying robust insights and practical steps to working with partners from academia, industry, government and charities.

Original post: https://unltdbusiness.com/if-you-ask-me-the-productivity-puzzle/

How Business Schools Can Help Unlock the Productivity Puzzle!

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The question of weak global productivity is a story that continues to dominate the mainstream media. Yet businesses tend not to be overly concerned with issues of productivity, per se, instead being preoccupied with efficiency and profitability. That said, the conundrum of productivity growth remains of central concern to governments around the world—and this is particularly acute in the UK. The now infamous quip of Nobel Prize-winning economist Paul Krugman—“Productivity isn’t everything, but in the long term it is almost everything”—will forever haunt governments.

In academe, productivity was once the privileged domain of economics research, yet this multifaceted challenge has become the research fodder of business and management schools around the world. Since total factor productivity, or the efficiency measure for all inputs involved in a production process, has fallen short of adequately explaining dismal productivity growth, business schools working in fields from leadership and management practice to foreign direct investment, and from innovation to well-being, have the potential to offer real insights. Arguably, this expertise positions business schools at the heart of the productivity debate.

However, the productivity puzzle is more than an academic exercise and, like other research questions, will not be addressed in disciplinary silos. By its nature academic research is often about paradigm building, but to truly advance the productivity debate, those of us in positions to effect change need to challenge the status quo. The launch of the Productivity Insights Network in the U.K., the collaborative effort of nine universities and two private-sector businesses led by Sheffield University Management School, is a model designed to change the tone of the productivity debate in theory and practice. The emphasis is on co-producing new insights and identifying alternative approaches to increasing productivity—with partners from academia, industry, government, and nonprofit organizations—that are both robust and relevant.

AACSB’s Collective Vision, which identifies five distinct opportunities for change in business education, refers to business schools as co-creators of knowledge. By building on their teaching and research strengths to work with businesses and foster dialogues with governments, business schools have the capacity to positively impact the societies of which they are a part. Although many business schools profess to be impactful, how devoutly do they adhere to and deliver against their values? The business school of the future will be evaluated according not only to research and teaching excellence but to impact excellence, as well.

In many respects, business schools are uniquely placed to deliver on impact, not least due to their convening power. The breadth of expertise in business schools often means that they are home to a broad spectrum of interdisciplinary scholars, and can provide a forum to work with academics from different disciplines ranging from the arts and humanities to science and engineering. Moreover, business schools have the ability to serve as a platform to bring together stakeholders, given their strong corporate connections and links to government bodies. This shared space serves as a distinct strength for co-producing new insights that have impact for theory and practice—a process set to become an ever-more collective endeavour as the emphasis shifts from doing research on individuals, organizations, and societies to doing research with them.

For complex and multidimensional topics, like productivity, working in this way is imperative not only to better understand the issues and challenges but also to ensure that the research makes a difference. The wider societal value of business schools is unlikely to be the result of game-changing research from the ivory tower alone, but rather the product of collective game-changing, research-led impact. This principle defines the approach of the Productivity Insights Network, by breaking down siloed thinking and promoting collaboration to generate new perspective on an established issue. We don’t just need more insights; we need new insights.

As the Productivity Insights Network embarks on a new three-year program of work, my excitement as a management academic is as much about the new ways of working as it is about grappling with the productivity puzzle. Clearly business schools are well placed to push the frontiers of productivity research, but co-creating the research with academic, industry, government, and nonprofit partners is critical to our ultimate influence and impact. By adopting the strategy of a co-creation position, initiatives like the Productivity Insights Network are at the intersection of academia, industry, and politics, and if business schools are to lead such major social, economic, and political debates, there is arguably no other way of working.

Productivity debate needs a reboot, in theory and practice

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Ideas from many disciplines are needed to understand and address the UK’s distinctive problems, say the leaders of a new research network.

The Nobel prizewinning economist Paul Krugman famously quipped that “productivity isn’t everything, but in the long run it is almost everything”. In its simplest form, productivity is a measure of the value produced per hour by the average worker. This is still the best overall index of living standards and prosperity.

In essence, productivity reflects how smartly we work. This does not just depend on the behaviour of individual people or firms, but on the interactions between a firm and the broader market, and the technological, institutional and cultural settings in which it operates.

A wide range of data suggests that productivity growth across the industrialised economies has slowed since the mid-20th century. This slowdown was evident by the turn of the millennium, but became much more marked after the global financial crisis.

Alongside this general puzzle there are some specific concerns for the UK. Its productivity slowdown appears to be one of the most severe among the advanced economies. Different places show some of the largest productivity gaps in the industrialised world. For example, London has productivity levels of more than 70 per cent above the UK average, while productivity in Wales, less than 200 miles away, is only 70 per cent of the UK average. For many reasons, the benefits of productivity breakthroughs are not as evenly spread as they are in other countries.

The newly established Productivity Insights Network, led by the University of Sheffield and funded by the Economic and Social Research Council, will consider all of these issues and seek to throw light on them by incorporating a range of thinking and ideas from different fields of social science, not solely economics.

The network will tailor its work to the UK context, integrating analyses and ideas from a range of fields including psychology, sociology, organisational science, geography, labour relations and environmental sciences, as well as economics.

How we think about productivity has evolved over recent years. Between the mid-1950s and the mid-1980s our understanding was based on the assumption that efficient markets would maximise the technological drivers of productivity. For three decades, productivity research was focused on the establishment and maintenance of efficient markets, with little thought given to the drivers or inhibitors of technological change.

Thinking started to change in the 1980s. Ideas regarding the role played by scale, systems, networks and knowledge spillovers in driving innovation were emerging from studies in business and management. In political science and sociology, the role of institutions in fostering economic development became more central.

These ideas reshaped thinking about productivity, just as the global economy entered a period of rapid globalisation. Since then, the rise of the so-called weightless economy, based on ideas and information and driven by rapid advances in digital technologies, has transformed many industries, especially in services. This challenges how productivity is understood and measured, especially in a country such as the UK, where services dominate the economy.

The future may see further changes due to the rise of automation, artificial intelligence and big data, alongside the effects of increasing ageing and debt. How exactly these will affect productivity is still an open question.

On productivity, the UK faces different problems to most other advanced economies, primarily because of its economic geography. It is the size of the UK’s variations that mark it out and limit national productivity growth.

The productivity puzzle, of course, is more than an academic exercise. Truly advancing the debate requires a challenge to the status quo. The Productivity Insights Network aims to change the tone of debate in both theory and practice. The emphasis is on producing insights and identifying robust and relevant practical steps, working with partners from academia, industry, government and charities. The initiative has already attracted the attention of the Department for Business, Energy and Industrial Strategy and the Treasury.

Even more than promoting and conducting game-changing research, the network is committed to game-changing impact. It has an ambitious programme of engagement, based on translating and disseminating existing research as well as pursuing new interdisciplinary and applied insights. The involvement of a wide range of organisations will challenge the network to deliver results for a range of communities.

As the Productivity Insights Network embarks on its three-year programme of work, this model of working is a new approach to grappling with the productivity puzzle.

Original post: https://www.researchprofessional.com/0/rr/news/uk/views-of-the-uk/2018/1/Productivity-debate-needs-a-reboot-in-theory-and-practice.html