A report recently published by Goldman Sachs, British Business Banks and Enterprise Research Centre, Unlocking UK Productivity shows that SMEs may be the key to economic growth in the UK.
Productivity is ultimately how efficient the firm is, how much output for a given level of input, which is measured in GDP per hour worked. Recent statistics show that UK levels of productivity are lower than other major European economies. Although pre-recession, productivity in the UK was on an upward trend; in 2013 it was still 14% below pre-crisis trend. This issue has led the Government to publish a 15-point plan in July in order to change the trend.
The report published by Goldman Sachs, BBB and ERC show that SMEs may be the key to reversing this trend. In the second half of 2012, greater availability of credit boosted growth, but some sectors benefited much more than others. Although interest rates were largely lowered for households and large corporations, they still remained high for SME loans and so SMEs were much slower to benefit.
SMEs in the UK account for half of the national output and 60% of employment. The report identifies internationalization and innovation as the key for SMEs to unlock UK’s productivity. The relationship between innovation and productivity are quite intuitive. Whereas internationalization forces SMEs to innovate when faced with international markets and greater competition, it also helps them gain foreign knowledge in order to boost productivity. SMEs that export tend to experience larger sale volumes and have a greater diversity in customer base, which ultimately stabilizes the revenue.
UK SMEs are held back largely due to growth ambitions. Only 18% of UK SMEs expressed ambitions to grow compared to the 27% in the US. Encouraging more firms to grow and innovate will have a significant impact on productivity on the UK.
To see the full report click here