UK PRODUCTIVITY AND MANAGEMENT SKILLS



One of the real mysteries regarding the current state of UK’s economy is the so-called productivity puzzle. which refers to the fact that labour productivity has stagnated since the economic downturn of 2008.

This is very different to what has happened after previous recessions where productivity initially fell but then recovered and returned to previous levels.

Whilst there has been considerable economic debate surrounding the causes of lower productivity and some attempts by politicians to address this issue, there has been little progress to date to explain what has been going on.

That is why a recent paper which examines the link between management practices and productivity within UK manufacturing businesses makes fascinating reading.

Those of us who have been working for many years within the academic discipline of business and management appreciate the growing evidence between the adoption of management practices and increased performance in terms of growth, profitability and, most important of all, productivity.

Yet most of this research has tended to be ignored by policymakers and therefore this latest study, which attempts to examine this phenomenon in the context of differences in productivity performance, is to welcomed.

By using existing international work on these areas, structured management practices are carefully defined as a number of important processes including continuous improvement, number and monitoring of key performance indicators (KPIs), timetables for targets and how these targets are stretched, employee promotion and underperformance and finally, hiring decision-making.

So what does this research from the Office for National Statistics tell us about productivity amongst UK enterprises?

The first critical finding is that the study estimates that an increase in the management score of 0.1 is (on a scale of 0-1) is associated with an increase in labour productivity of 8.6 per cent. Simply put, an increased focus on management practices makes the business more efficient and effective in terms of productivity.

Of course, as management becomes more formalized as the company grows, it is not surprising that scores for management practices increase with the size of the firm i.e. the more people a company employs, the higher the management practice scores.

Given the link with productivity, the data shows that the average annual output per worker increases from around £40,000 for small businesses (10 to 49 employment) to £53,000 for medium-sized businesses (50 to 99 employment) and £62,000 for large businesses (employment of 250 and over).

The study also looks at the type of businesses that are productive and shows that
multinationals, large businesses (employment of 250 and over) and non-family-owned businesses have higher management scores and are more productive than domestic, smaller and family-owned businesses.

Of course, this study has focused on only one influence on productivity and there needs to be more research that into other sectors and, more importantly, on the influence of other factors on business performance such as innovation, skills and capital.

Nevertheless, given the lack of focus by policymakers on supporting the development of management skills within small firms, there is a clear message here that there needs to be a greater priority given to this vital area if the issue of falling productivity is to be addressed.

This is a particular issue for Wales as the latest regional productivity data shows that it has the worst performance of part of the UK at 80.1 of the average productivity for the economy.  In terms of city regions, only Sheffield does worse than Cardiff across the UK.

Despite this, the issue of productivity and how to improve it doesn’t seem to be on the current economic agenda of the Welsh Government, although it does have the opportunity to address this urgently when a new industrial strategy is drawn up later this year.

However, this is not only an issue for politicians alone and as this column has reiterated on several occasions, there is a real need for universities and business schools to not only focus on supporting traditional students but also to ensure that the latest management practices are adopted by a small firm community which currently seems reluctant to do so.

If that could be done (and done properly) then the impact on the Welsh economy and its future prosperity could be more significant, in terms of productivity, than anything else over the next decade.

STARTUP PERFORMANCE IN WALES

One of the key economic indicators regarding growth of an entrepreneurial economy is the number of new businesses being born every year.

As various academic research studies have shown, young firms create the majority of jobs in an economy and, simply put, employment will rise with an increase in the number of start-ups.
For example, a study from the Kauffman Foundation in the USA showed that new businesses account for nearly all net new job creation. Indeed, companies less than one year old have created an average of 1.5 million American jobs per year over the past three decades.

That is why the most recent data published by the Office for National Statistics (ONS) on business births in the UK is to be welcomed as it shows that a total of 1.85 million new firms have been established during the period 2010-15.

Of course, there have also been 1.47 million businesses that have closed down over the same period but the overall growth in the stock of firms means that net effect on the economy (and employment) has been positive for the last five years.

In fact, the situation has been improving year on year and the 383,000 business births in 2015 were the highest recorded since comparable records began in 2000, equivalent to a business birth rate (i.e. new firms as a proportion of active businesses) of 14.3 per cent.

This increase in the number of total business births is probably reflected in the strengthening of the labour market from an employment rate of 70.5 per cent in December 2010 to 74 per cent at the end of 2015.

In addition, the rate of business deaths has fallen to 9.4 per cent, the lowest level since 2006 with firms surviving longer as a result. Indeed, the data shows that four out of ten businesses born in 2010 are still active in 2015, which is a major improvement on the position during the last decade.

In terms of regional differences, London had the highest business birth rate (18.6 per cent) and Northern Ireland the lowest (9.7 per cent). Interestingly, this also seems to be reflected in the growth in the relative prosperity of both regions since 2010 as discussed in last week’s column.

If we examine new business formation by industry, the highest rate of business births in 2015 was business administration and support (20.4 per cent), which probably reflects the ease by which a business can be established in this sector but also the growing demand for such services within the wider economy.

It is also worth noting that in terms of absolute growth in the number of business births between 2010-15, a total of 160,000 business administration and support firms were created. This was followed by management consultancy (154,485), retail (142,265), specialised construction (138,735) and computer programming/consultancy (130,490).

This is not surprising as there has been evidence of an increase in new businesses being established in niche areas by professionals with support structures, such as co-working spaces, being created to encourage such growth.

In terms of the percentage increase in the number of new firms, the surprising growth sector over this period was “electricity, gas, steam and air conditioning supply” which went from 220 new firms in 2010 to 3,220 in 2015 (an increase of 1364 per cent). This probably reflects the increase in smaller scale generation around the UK over the last few years and is good news for the further development of this market, especially in terms of local environmentally friendly energy schemes.

In Wales, the business birth rate was slightly lower than the UK at 12.1 per cent in 2015. The overall number of new businesses had increased by 58,190 since 2010 with a total of 51,970 firms closing over the same period.

In terms of percentage growth since 2010, the annual number of new businesses created in the Welsh economy has grown by 54 per cent. This is lower than the UK average (63 per cent) over this period but considerably higher than either Scotland or Northern Ireland.

Not surprisingly perhaps, Cardiff has created the largest number of new firms (8,645) since 2010, accounting for 15 per cent of the Welsh total. However, the highest growth rate over the six-year period has been experienced in Merthyr Tydfil and Blaenau Gwent, suggesting that entrepreneurship may be finally beginning to flourish in our poorest communities where it is most needed.

Therefore, the good news for the UK economy is the statistics suggest that an enterprise revolution over the last few years is having a positive effect on jobs and prosperity and whilst Wales is doing relatively well as compared to other regions, there is remains scope for improvement over the next few years in ensuring that entrepreneurial activity develops further.

STARTUP PERFORMANCE IN WALES

One of the key economic indicators regarding growth of an entrepreneurial economy is the number of new businesses being born every year.

As various academic research studies have shown, young firms create the majority of jobs in an economy and, simply put, employment will rise with an increase in the number of start-ups.
For example, a study from the Kauffman Foundation in the USA showed that new businesses account for nearly all net new job creation. Indeed, companies less than one year old have created an average of 1.5 million American jobs per year over the past three decades.

That is why the most recent data published by the Office for National Statistics (ONS) on business births in the UK is to be welcomed as it shows that a total of 1.85 million new firms have been established during the period 2010-15.

Of course, there have also been 1.47 million businesses that have closed down over the same period but the overall growth in the stock of firms means that net effect on the economy (and employment) has been positive for the last five years.

In fact, the situation has been improving year on year and the 383,000 business births in 2015 were the highest recorded since comparable records began in 2000, equivalent to a business birth rate (i.e. new firms as a proportion of active businesses) of 14.3 per cent.

This increase in the number of total business births is probably reflected in the strengthening of the labour market from an employment rate of 70.5 per cent in December 2010 to 74 per cent at the end of 2015.

In addition, the rate of business deaths has fallen to 9.4 per cent, the lowest level since 2006 with firms surviving longer as a result. Indeed, the data shows that four out of ten businesses born in 2010 are still active in 2015, which is a major improvement on the position during the last decade.

In terms of regional differences, London had the highest business birth rate (18.6 per cent) and Northern Ireland the lowest (9.7 per cent). Interestingly, this also seems to be reflected in the growth in the relative prosperity of both regions since 2010 as discussed in last week’s column.

If we examine new business formation by industry, the highest rate of business births in 2015 was business administration and support (20.4 per cent), which probably reflects the ease by which a business can be established in this sector but also the growing demand for such services within the wider economy.

It is also worth noting that in terms of absolute growth in the number of business births between 2010-15, a total of 160,000 business administration and support firms were created. This was followed by management consultancy (154,485), retail (142,265), specialised construction (138,735) and computer programming/consultancy (130,490).

This is not surprising as there has been evidence of an increase in new businesses being established in niche areas by professionals with support structures, such as co-working spaces, being created to encourage such growth.

In terms of the percentage increase in the number of new firms, the surprising growth sector over this period was “electricity, gas, steam and air conditioning supply” which went from 220 new firms in 2010 to 3,220 in 2015 (an increase of 1364 per cent). This probably reflects the increase in smaller scale generation around the UK over the last few years and is good news for the further development of this market, especially in terms of local environmentally friendly energy schemes.

In Wales, the business birth rate was slightly lower than the UK at 12.1 per cent in 2015. The overall number of new businesses had increased by 58,190 since 2010 with a total of 51,970 firms closing over the same period.

In terms of percentage growth since 2010, the annual number of new businesses created in the Welsh economy has grown by 54 per cent. This is lower than the UK average (63 per cent) over this period but considerably higher than either Scotland or Northern Ireland.

Not surprisingly perhaps, Cardiff has created the largest number of new firms (8,645) since 2010, accounting for 15 per cent of the Welsh total. However, the highest growth rate over the six-year period has been experienced in Merthyr Tydfil and Blaenau Gwent, suggesting that entrepreneurship may be finally beginning to flourish in our poorest communities where it is most needed.

Therefore, the good news for the UK economy is the statistics suggest that an enterprise revolution over the last few years is having a positive effect on jobs and prosperity and whilst Wales is doing relatively well as compared to other regions, there is remains scope for improvement over the next few years in ensuring that entrepreneurial activity develops further.