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Productivity and innovation

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The UK productivity puzzle

Opinions differ on why UK productivity has failed to keep pace with our global competitors. The government’s recently published “Productivity Plan”, lays out the stark facts that we are 31% behind the US, 28% behind Germany, 27% behind France and 17% behind the G7 average. As a result, the government has placed productivity at the very core of its economic plans. So how do we achieve a step-change in the UK’s productivity?

Productivity versus growth

Lets start by understanding a bit more about the problem. The good news is that the UK economy has been successfully growing its output and employing more people, whilst other economies have stalled. The dilemma is that the UK output has grown largely in line with employment whilst our competitors’ output has grown faster than employment and as a result many of them are progressively delivering a much higher level of output for each hour worked. So even though our growth is very welcome news indeed in the short term, we are steadily becoming less competitive and will therefore inevitably lose out, in the medium to long term, to more productive global competitors. If we think of the economy as a machine, in the UK we have been concentrating on growing the economy by getting more people to turn the handle of the existing machine, whilst our competitors have been building a longer term advantage through investing in a much better economic machine.

Building a better economic machine

There are many facets to productivity and as with so much of economics, it’s a complex interrelated system of systems. The government’s Productivity Plan is founded on two main pillars: Firstly encouraging long-term investment in economic capital, infrastructure, skills and knowledge and secondly promoting a dynamic economy that encourages innovation and helps resources flow to their most productive use. These are all weighty topics but “encouraging innovation” is something Innovate UK knows how to do and according to studies by the OECD and Nesta, it is innovation, which accounts for 25 to 50% of labour productivity growth. So if we want a step change in UK productivity, we will make big strides towards achieving that goal through having an ambitious plan for a step change in business-led innovation.

Innovate UK’s 5-point plan

Over the last 3 months, Innovate UK has been putting together a 5-point plan in order to rise to the challenge of delivering a step change in innovation right across the UK. Our Chief Executive, Dr Ruth McKernan, recently presented an overview of that plan to an Research Council UK event focused on ensuring that the UK remains the very best place in the world to research, innovate and grow. Lets finish by considering each point of Innovate UK’s plan.

  1. Accelerating UK economic growth. This has always been the mission of Innovate UK and going forward we will raise our level of ambition for the UK by enabling the very best, high potential businesses to scale all the way to highly productive mid sized companies embedded in the value chains of key sectors.
  1. Building innovation excellence throughout the UK. It was at the end of last year, that the updated Science and Innovation Strategy recognised for the first time the importance of place. The government’s Productivity Plan, calls for resurgent cities, a rebalanced economy and a thriving Northern Powerhouse. Recently BIS published an analysis of the geographic distribution of Innovate UK’s investments. You might be surprised to learn that if you look at our expenditure by head of population, the top three regions, which won Innovate UK funding in 2013-14, were the North East, the South West and the East Midlands. Scotland won exactly the same level of investment as the South East and the investment in London was less than the UK average. The competitions Innovate UK are running are successfully identifying innovation right across the UK and our new level of ambition is to build on those local strengths and to encourage the scaling up of highly productive businesses throughout the UK.
  1. Developing Catapults within a UK innovation network. Where do you go for help if you want to move your business onto the leading edge? Each of the Catapults brings together under one roof in depth expertise and equipment which enable companies to reinvent themselves and transform the way they do business, whether that is in High Value Manufacturing, Satellite Applications or in the future, Medicines Technologies (the very latest member of the Catapult network to be announced). The government’s Productivity Plan also recognises the critical importance of transforming the UK’s transport, energy and digital infrastructures in order to strengthen productivity and each of these is a priority area in Innovate UK’s investment plan and a key focus of our Catapult network.
  1. Working with the research community and across government. We have an outstanding research base in the UK, creating new opportunities and a fresh perspective on the challenges ahead. Our plan seeks to raise the level of ambition in translating and commercialising that research within the UK economy or the spillover effects will simply be left to fuel the productivity growth of our global competitors. The government Productivity Plan also calls for an improvement in public sector productivity to benefit the economy, taxpayers and those who use public services. There is a powerful win-win here for the government if it seeks out the innovative ideas that agile new businesses can provide and in return gives them the credibility of having the government as a lead customer.
  1. Alternative Finance. For those activities, which are closer to market and where business confidence is higher, there are opportunities for Innovate UK to enable commercial finance to be brought in much earlier. This in turn would allow Innovate UK itself to be more efficient in the use of its own investments.

For a step change in productivity, we need a step change in innovation.

Follow Kevin Baughan on Twitter: @KevinBaughan

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  1. Comment by Christian Browne posted on

    Its an interesting article. In relation to innovation the UK should be actively promoting the protection and commercialisation of intellectual property in relation to start up companies including university spin out companies. One of the problems for early stage companies is that patent protection is expensive and in certain cases the expense is unduly prohibitive. However this is a catch 22 scenario in that if an early stage company is based around intellectual property protection/ development then the company won't receive any external seed funding until the patents are registered, but the company may not have sufficient revenue to pursue patent protection. This is where grant funding comes in since such funding can be accessed at a very early stage to assist with patent protection etc. The UK government should actively promote UK and EU sources of grant funding so that founders know when and who to approach for grant funding.
    Christian Browne -

  2. Comment by Carolyn Roberts posted on

    I agree that this can be problematic for some small companies, and spin outs or sole operators. The Knowledge Transfer Network, part of the Innovate UK family, should be able to provide some advice on this from an appropriate tech specialist, depending on the technical area involved. We also have specialists on finance and intellectual property.

  3. Comment by Judith James posted on

    Please could you explain why Wales has such a low rate of investment from Innovate UK?

    • Replies to Judith James>

      Comment by Kevin Baughan posted on

      Hello Judith.

      Our investment programme is driven by UK-wide competitions, so an important component of where our investments are made is guided by the number of successful applications from Wales. It is therefore important that innovators in Wales are both aware of Innovate UK's competitions and are submitting high quality applications.

      We are working closely with the Welsh Government to promote awareness of the Innovate UK funding opportunities - for example, my senior team returned to Wales earlier in the year in order to lift the visibility of our activities ( We will also be back very shortly in Wales through our sponsorship of and participation in Venturefest Wales ( which brings together entrepreneurs, investors and innovators to inspire business growth. Do come along and meet the team.

      We aren't the only people supporting innovation in Wales however. The Welsh Government also offer their own innovation funding schemes and we've found that innovators often turn first to the most local source of funding - so it may well be that part of the demand for innovation funding support is being satisfied by these programmes rather than Welsh businesses turning to the support Innovate UK provides (

      The other important component of the investment is in innovation infrastructure - for example, Innovate UK, together with the EPSRC and the Welsh Government, have invested in the "Specific" Innovation and Knowledge Centre which is exploring the opportunities for using buildings as power stations ( ). We know that there is a strong desire to see a higher level of investment in the innovation infrastructure in Wales and we understand the enthusiasm to see this happen. One way we are exploring how this could happen is through our partnership with areas right across the UK and looking at how we can "build on local strengths". Part of this is helping to develop clusters like the med-tech businesses in South Wales (including a Swansea University spin-out) that we supported through our Launchpad programme ( I'm certainly looking forward to using these approaches to bring a fresh perspective through which we can fund and connect business-led innovation in Wales.

  4. Comment by Steve posted on

    Interesting post. You didn't touch on one thing I might have expected to come up in a discussion like this, namely the role of capital-labour substitution. The U.K. has put effort into making sure that we have a flexible labour market. This means keeping the marginal costs for firms of hiring new employees down. In many of the countries you list at the start of the article, labour regulation makes it more expensive for a firm to hire new staff. Economic theory suggests that when this happens, firms will invest in capital instead (up to a point), which would explain France's high productivity rate. This would explain why the UK is growing in employment but not productivity and poses a hard question: if keeping labour costs down might discourage investment in automation and hence keep productivity from rising.

    • Replies to Steve>

      Comment by Kevin Baughan posted on

      "Steve, thank you for your comment.

      You raise an important point on the role of capital investment in our economy. As I noted in the blog, when I look at our economy, I see a complex interrelated system of systems and so unravelling that to understand causation is going to be difficult (hence the "UK productivity puzzle"). Your point does put emphasis on a different dimension of that puzzle though and whilst a less flexible labour market in Europe may contribute to a stronger focus on capital investment in order for those countries to compete in global markets, the US which arguably has an even more flexible labour market than the UK is more productive than both Europe and the UK. Others have argued that higher real wages will also trigger businesses to reorganise production and invest in training as well as in capital. Its a complex system of systems.

      I argued in the blog that what was needed in the UK was increased investment in a much better economic machine and that innovation was a key component of realising that machine. The programmes run by Innovate UK are designed to facilitate those step changes and we see the winning projects achieve that in many different ways: through better products & services, through better processes, through better business models etc. Often the concepts involved will require businesses and supply chains to make significant capital investments. Our goal is to bring about the confidence and consensus in the associated business communities which is needed to trigger that investment."