Targeting ‘long tail’ of underperforming firms is not the answer to UK productivity problem

That is according to a report published today by the think tank Centre for Cities, which examines the idea that a ‘long tail’ of unproductive firms are the cause of sluggish UK productivity – and that boosting their performance will be vital in addressing this problem.

This idea has been championed by economists at the Bank of England and OECD, and yesterday the Government launched a new Business Productivity Review to help unproductive firms step up their performance, which it says could unlock £100 billion for the UK’s economy.

However, the Centre for Cities analysis offers important new insights into the UK’s productivity problem, which suggest that the focus for policymakers should be less on underperforming firms – and more on improving further the performance of already highly-productive businesses in cities across the UK:

1. The ‘long tail’ is almost entirely made up of firms which cannot be expected to significantly increase productivity.

• 94% of UK businesses which are in the bottom third for productivity are local services firms – i.e. those which only serve local markets – such as hairdressers, cafes, small construction companies and gyms.
• These firms have little capacity to increase productivity because of the size of their markets, and because of their limited capacity to benefit from innovations. For example, the work of a waiter or hairdresser has changed little in the past 50 years, despite technological advances.
• This is reflected in the fact that productivity in accommodation and food services businesses grew by only 2% between 1990 and 2017, while productivity in arts, entertainment and recreational firms declined in this period.

2. Instead of focusing on ‘long tail’ firms, the priority should be improving the performance of businesses that already drive UK productivity: those which export across the country and globally.

• Exporting businesses – such as those found in the ICT, manufacturing and marketing sectors – make up only 13% of all British businesses, but account for nearly a third (31%) of the UK’s most productive firms (1).
• These firms have a greater capacity for growth because of the scale of their markets, and their capacity to benefit from innovations such as automation. As a result, between 1990 and 2017, productivity more than doubled among firms in the information and communications sector and tripled among those in the chemicals and pharmaceuticals sector.

3. In particular, the priority for policy-makers should be to increase the number of high-performing exporters in cities outside the Greater South.

• The analysis shows that 61% of Britain’s most productive exporting firms are based in cities, because of the access they offer to labour markets, infrastructure, clients and other related businesses.
• However, these firms are disproportionately based in cities in the Greater South East, which are home to 25% of all UK businesses, but 34% of high-performing exporters. In contrast, cities in the entire rest of Britain account for only 28% of these firms.
• As a result, cities in the Greater South East are nearly 50% more productive than those elsewhere in Britain, which is reflected in the disparities in wages across the country.

Andrew Carter, Chief Executive of Centre for Cities said:

“The biggest factor dragging down UK productivity is not underperforming businesses – it’s the fact that cities outside the Greater South East are home to too few highly productive firms which drive national economic growth.

“The priority for policymakers should be to help cities tackle the obstacles which prevent them from supporting more of these businesses. In many instances, that will mean a much bigger focus on addressing skills-gaps in their labour markets or improving infrastructure to create a better environment for these kinds of businesses to thrive in.

“This will ultimately have a bigger impact in pushing up national productivity – and improving living standards for people across the UK – than efforts to help unproductive firms increase output. It should be a key consideration for the Government and for cities as they finalise their local industrial strategies in the coming months.”

ENDS

For more information, or to arrange an interview, please contact Brian Semple, Head of Communications at Centre for Cities, at b.semple@centreforcities.org or 0207 803 4316 / 07595 439 638.