There has been a great level of debate around our recent briefing on the ‘long tail’ of unproductive firms (with thanks to all those that have contributed). It’s worth capturing and reflecting on some of that discussion here.
In the briefing, we argued that the focus for policy makers tasked with boosting the UK’s productivity should not be on what’s been described as the ‘long tail’ of poorly-performing firms, which are mostly ‘local services firms’ (i.e. they only serve local markets). Instead, the priority should be to further improve the performance of already highly-productive businesses, especially in cities outside the Greater South East.
Responses to this argument have fallen into three broad categories.
The first critique is that focusing on more productive businesses – rather than tackling low productivity firms – will do nothing for inclusive growth. This concern is understandable, but we have to be clear here about what the policy is trying to achieve. If the primary aim is to address the UK’s poor productivity, the target must be to improve the performance of its exporting businesses. If instead, it is to boost jobs, then interventions aimed directly at local service businesses may be more appropriate, as productivity and employment don’t necessarily go hand in hand (for reasons set out in this blog).
To be clear, though, a better performing export sector is good news for local services businesses: having more and better-exporting jobs increases demand for local services and the jobs they provide. This is why the high streets of successful cities perform well, despite the general gloom around the high street – people in these cities have money to spend because of the vibrancy of their exporting base.
The second response is that something should be done to improve the productivity of local service firms, even if it won’t have a big impact on national productivity. The argument here is that some small firms are missing out on innovations or examples of good practice which could help them grow their business – for example, using marketing more effectively or creating a website. Therefore, policy-makers should focus on helping these firms act on these steps. This is no doubt true, but it raises several queries for policy:
- Should the Government be getting involved with some of these interventions? And if so, is it feasible? Central and local government hardly have the time or resources to knock on doors of businesses up and down the country to tell them how to set up a website.
- There are many resources already available for businesses to change their practices, both free and paid for. A barber, for example, can set up a Facebook page for no cost, and many do (and for those that don’t, this may be signalling that it actually isn’t worth it). Meanwhile, there are a number of private companies that offer advice to businesses. So again, what is the role of the Government?
- If there is only so much demand in a local economy due to the poor performance of the exporting base, then improvements to one local service business may come directly at the cost of another. This will result in the displacement of firms and jobs, rather than improving the total number of jobs available.
The third counterargument to our briefing is that the focus on productivity is misplaced in terms of bringing prosperity to more places across the country. Instead, policy-makers should focus on developing a different model for growth, aimed at spreading growth beyond the Greater South East. However, acting on this view could be a case of throwing the baby out with the bathwater, as it doesn’t consider the reasons why the Greater South East has been successful – namely its ability to attract in high productivity exporter businesses – and the lessons this offers to other places. It is by understanding this and then addressing the barriers that have deterred such businesses from investing elsewhere in sufficient numbers that the benefits haven’t spread across the country.
To improve prosperity across the country, and improve national prosperity overall, then policy needs to address the lagging productivity of many cities outside of the Greater South East. This will require a focus on attracting, retaining and growing exporting businesses in their economies.
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