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.
- 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.
- 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.
- 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.
- 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.
- 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