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 the last couple of years, and the Chancellor has announced the Business Productivity Review to look at it.
But the thinking to date has not recognised that not all businesses are capable of large increases in productivity gains. Specifically, local services businesses such as hairdressers and restaurants are both low productivity and have limited scope for growth. And it is these types of businesses that dominate the long tail.
This analysis adds two main insights to the productivity debate. 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 report), 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.
These cities, in particular, should be of greatest concern to policy makers attempting to improve UK productivity overall.