The Productivity Puzzle: Problems for small business

Small business
By Michelle Perry, CA magazine

23 August 2018

When considering the productivity puzzle, perhaps of greatest concern is the differing levels between large and small companies, given that research suggests a huge gap still exists.

Given that small businesses make up 99.9% of all business in the UK, equating to a combined turnover of £1.8tn and accounting for 60% of all private sector employment, more focus should be trained on small businesses when attempting to boost productivity.

A Close Brothers survey of more than 1,400 SMEs across the UK, France and Germany suggests there is a productivity measurement gap across all countries. Nearly three in 10 are not measuring it at all, while one in 20 SMEs don’t even know what productivity is. Significantly, 28% of SMEs that do not measure productivity say they don’t know how to.

SMEs measuring productivity

According to the Close Brothers research, UK SMEs are more concerned with apprenticeships than their European counterparts. One in five UK SMEs say they would like Government help in this area, compared to just one in 10 German SMEs.

Just over a year ago the Government introduced the apprenticeship levy to encourage more businesses to take on apprentices and tackle the skills shortage, in turn boosting productivity.

However, the scheme has been widely criticised for being too bureaucratic and inflexible. According to data obtained by the Open University under the Freedom of Information Act, of the £1.39bn paid into the levy by businesses in England, just £108m has been accessed, indicating that employers could be struggling with the system.

The diffusion of the best management practices and technology isn’t going down the chain to small businesses in the UK.

Some economists are sceptical about the benefits of the apprenticeship levy, suggesting this is an example of Government good intentions but poor execution.

Red tape in dealing with issues such as pension paperwork and health and safety regulations as well as taxes all contribute to SMEs’ struggle to make time to improve, or even measure, productivity.

When will strategy benefits be felt?

Despite Government’s piecemeal efforts with schemes such as this and the industrial strategy, it is believed they lack the funds behind them, meaning that the benefits will take years to filter down. Instead, economists suggest more incentives are needed - cutting red tape, reducing taxes and generally relaxing the rules on small businesses.

“They are all steps in the right direction, but they are all pretty small. The Government hasn’t got huge sums of money to throw at this. They are all welcomed but I can’t see them having a big impact on productivity because the sums involved are small,” said Howard Archer, Chief Economic Adviser, EY ITEM Club.

There are also concerns about the weak dissemination of management best practices from large to small businesses. Yael Selfin, Chief Economist with KPMG, commented: “We have seen a reduction in regional mobility, which means you have less in what we call the pick-up in best practice from regions like London where productivity tends to be higher.”

Tej Parikh, Senior Economist at the Institute of Directors, agreed: “The diffusion of the best management practices and technology isn’t going down the chain to small businesses in the UK as well as it has in other countries. The reason why that’s more noticeable in the UK is that we are a major start-up nation.”

A global problem

It is important to note that productivity isn’t just a British problem. Productivity levels have remained low in all developed nations since the financial crisis; it is not unique to the UK.

Low interest rates, a lack of investment in skills, innovation and capital, structural sectoral shifts, and a drag from underperforming sectors are problems facing all advanced nations. But Britain appears slower to react to these developments.

Maybe as Brexit approaches it will focus the minds of employers and galvanise them into investing more in the skills and training of their existing employees, as well as making capital investments.

On the other hand, if the effect is to reduce collaboration at European level, then we stand to lose the links to best practice. Long-term it is expected that UK productivity will increase, but whether Britain can develop as quickly as other advanced economies and bridge the existing productivity gap remains to be seen.

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