There is a live debate amongst policy makers about how to improve the performance of the long tail. This research shows that while the long tail certainly exists, it acts as somewhat of a red herring for policy makers. The scope for improving the productivity of many local services businesses is limited because of the nature of their business.
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 exporting businesses, rather than all businesses. This requires an intervention at the firm level. The second is that it is the underperformance of cities outside of the Greater South East, and particularly their struggles to attract high performing exporters, which causes not only divergences across the country in wages and standards of living but also hampers national productivity. This requires an intervention at the city level.
Instead of taking a blanket approach aiming to make all businesses more productive, policy will need to recognise the inherent differences between local service and exporting businesses and different parts of the country in terms of their ability to improve their productivity. And it will need to note where it is possible for it to have an impact, and what the scale of this impact might be. Given this, policy should take three approaches to improve productivity in the UK.
1. Focus on exporters – firms that either currently or have the potential to sell beyond their local market – to tackle weak productivity
The scale of local services means that these firms play an important role in the national economy. In numbers they dwarf exporters, accounting for almost three-quarters of all jobs and close to nine in every 10 businesses in the non-financial private sector economy. But this scale doesn’t mean that small improvements in the productivity of local services will have a much greater impact than improvements in the productivity of exporters.
While of course an increase in productivity in any industry is welcome, and would hopefully increase wages of the many people in local services jobs, the impact of an increase in local services on overall productivity is likely to be limited because of the lower productivity of these activities. For example, a 1.8 per cent increase in the productivity of local services would deliver a 1 per cent increase in national productivity. But despite exporters being much fewer in number, they would need just a 2.3 per cent increase in productivity to achieve the same overall national uplift. This is because of the much higher rates of productivity amongst these
There is also a question of the ability to achieve productivity increases in the two sectors. As shown above, growth in local services industries in recent decades has been very slow because of the ability of these industries to absorb new innovations. For this reason, we should not be surprised that there has been a widening of the gap between leaders and laggards in recent years, as the OECD has identified and the analysis above suggests – it is high-performing export businesses that are chiefly responsible for productivity improvements.
And if the UK economy is to improve its productivity performance in the future, this divergence will likely continue.
For these reasons, while improving the performance of the long tail is desirable, it should not be expected to do the heavy lifting in improving national productivity. Local services play a crucial role in providing jobs. But solving the UK’s poor productivity won’t be delivered by hairdressers and retailers. It’ll be done by boosting the performance of its designers and software engineers.
As Box 6 discusses, improving the performance of these exporters will have a knock-on impact on employment in local services.
Box 6: The relationship between exporters and local services
The performance of exporters, both in terms of productivity and job creation, has important implications for jobs growth in local services. Exporting businesses not only drive productivity, but they bring money into an economy from the trade in other markets. This money increases demand for local services such as restaurants and retailers, which in turn creates employment in these activities. While estimates of the size of this multiplier effect vary, higher-skilled exporters appear to have a larger job creation impact than lower-skilled ones.
That said, there is no doubt that gains, albeit modest, could be made in the current productivity of local services businesses in all parts of the country. Those companies that don’t follow best practice, for example through keeping good records, better use of cloud computing or effective marketing, could see improvements to their businesses. But there are two issues for policy here. Firstly, this is likely to make only a marginal difference to national productivity. And secondly, it’s questionable as to what the role of government is in bringing about this behaviour change.
This has two implications. Firstly, the Government should not develop specific interventions for local services businesses, such as sector deals for sectors such retail and hospitality as part of its industrial strategy, in the hope of creating large productivity gains in such sectors.
Secondly, it will be nigh on impossible for Government to effectively reach all local services businesses, and business support interventions have a checkered history. Local business organisations such as Chambers of Commerce and business improvement districts are better placed to offer guidance on best practice to their member network.
Given this, central Government should consolidate general guidance it has on running a business and the work of Be the Business (an organisation set up to tackle poor productivity) on its gov.uk website and engage with these organisations about distributing relevant material. Added to this, the business organisations should view sign posting to private companies who can offer mentoring and business advice in their area as a central part of what they do. Business improvement districts in particular have a much broader role to play than just aiming to increase footfall on the high street, as many appear to have positioned themselves to do.
2. Improve management practices of existing exporters through continued professional development courses
Improving the performance of existing exporters will no doubt have a contributing impact on productivity. And improvement of management practices through mentoring and continued professional development for these businesses, as has been suggested elsewhere in light of research showing issues around management quality in the UK, is likely to be helpful. Added to this, the What Works Centre for Local Economic Growth’s (WWCLEG) review of business support policies showed training to be one of the more effective interventions in this area.
There are already courses available that provide this training. Box 7 explains how University of Teesside brings both of these elements together through its Leading Growth and Management Catalyst programmes, while Lancaster University’s LEAD programme has similar aims.
These programmes could be rolled out through universities and further education colleges across the country to help spread learning and best practice amongst exporter businesses. As the Government makes decisions about the Shared Prosperity Fund, the replacement to European funding that has supported such programmes in the past, some money should be allocated to support this roll out.
For those exporters looking to sell to international markets, evidence from the WWCLEG business support toolkits also suggests that Export Credit Agencies, which help finance exports by providing direct credit, credit guarantees, or credit insurances, play a positive role. Where t isn’t already, UK Export Finance should work with local Chambers of Commerce to widen understanding of what they do to support selling to international markets.
Box 7: University of Teesside’s management programmes
The University of Teesside undertakes a number of programmes designed to improve business management skills within small and medium sized businesses. The Leading Growth programme is targeted at business leaders, and runs for six months. Participants undergo a number of training courses, have access to five hours of personal coaching and go on a number of site visits to other businesses to see how other businesses are run. A number of business collaborations between attendees have also been sparked since the course began in 2014.
Complimenting this programme, the university also runs a Management Catalyst programme tailored for middle management. Both programmes are fully funded by ERDF funding until 2020, but no funding as yet has been secured after this point.
3.Focus on addressing the weaknesses that make cities less attractive to high-skilled exporters
There is a temptation for policymakers to create a long list of policies designed at improving firm level productivity. But the main challenge for underperforming cities has been their struggle to attract higher-skilled exporting businesses, with implications for their productivity, despite the inherent advantages they should offer to high productivity businesses.
If this is to change then these cities need to offer the advantages that high-skilled businesses are looking for – namely access to knowledge in the form of high-skilled workers, and increasingly in the case of services exporters, a dense city centre. This should be the main focus of the local industrial strategies that are currently being developed between the Government and local areas as part of the wider industrial strategy.
The underperformance of many cities outside of the Greater South East pulls down national productivity when they should be leading it. Focusing on reducing the barriers that cause this underperformance should be the chief concern of policy makers as they seek to improve productivity in the UK.