The idea that a ‘long tail’ of unproductive businesses is the root cause of the UK’s productivity problems has captured the imagination of policy makers in recent years and been championed by economists at the Bank of England and OECD. The Government has now 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, our 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 the performance of already highly-productive businesses in cities across the UK:
- The first is that to improve productivity, there needs to be a sharper focus on improving the productivity of businesses that sell beyond their local markets (referred to as ‘exporters’ in this briefing), such as aerospace manufacturers or software engineers, rather than a blanket approach to all businesses.
- The second is the performance of exporters across the country. Specifically, it is the underperformance of exporting businesses in cities outside of the Greater South East that causes not only divergences across the country in wages and standards of living but also hampers national productivity.
The report recommends that policy makers should take three approaches to improve productivity in the UK:
- Focus on exporters – firms that either currently or have the
potential to sell beyond their local market – to tackle weak
- Improve management practices of existing exporters through
continued professional development courses
- Focus on addressing the weaknesses that make cities less
attractive to high-skilled exporters.