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Government policy and business productivity: does it help or harm?

This blog is based on an episode of Productivity Puzzles, Government policy and business productivity: does it help or harm?.

The UK’s policy landscape is a complex tapestry influencing business productivity. Some argue that the best policy is for the government to stay out of the way, yet government plays a crucial role in shaping the conditions within which UK firms operate. This includes not just regulations and competition but also training, innovation support, and broader policies like health and education.

Not all businesses are the same. The most productive firms, often referred to as “superstar firms,” like Google and Amazon are pulling ahead. However, a significant portion of firms just behind them have slowed down the UK’s overall productivity growth. Therefore, policies need to cater to the diverse needs across the productivity spectrum.

Technology and innovation policies

For multinational companies, a competitive policy environment should offer access to top talent, collaboration with universities, and a competitive research and development (R&D) tax regime. On the other hand, start-ups need access to patient capital and support in growing their customer base. SMEs, which form the backbone of the UK economy, can benefit from adopting new technologies like Customer Relationship Management systems and cloud computing. However, barriers such as skills, IT literacy, data security, and staff resistance hinder their adoption.

Internationalisation: trade and FDI

International exposure benefits firms through trade and foreign direct investment (FDI), driving productivity growth. The UK has a strength as a services superpower, but challenges exist in free trade agreements focused more on goods than services. Issues like mutual recognition agreements, digital infrastructure access, and digital trade barriers need addressing to boost services trade.

Brexit has posed challenges for UK firms, especially exporters. Although trade deals have been established, they have not fully compensated for the losses. Open markets push UK firms to improve, but policy challenges remain.

Skills and management competencies

Skills development remains a key area for boosting productivity in the UK. While apprenticeships and degree apprenticeships have grown, firms still report skills gaps. Adult skills and lifelong learning should be a critical area of focus for government intervention. There is a market failure where businesses lack incentives to provide sufficient training, because once you train someone, they become more marketable and so are more likely to leave – and if they do leave, the benefit may go to a competitor.

Management and leadership skills are also crucial. Well-managed firms tend to deploy best practices more effectively, driving productivity. Initiatives like Help to Grow: Management show promise but face challenges in encouraging business leaders to participate.

Framework conditions

Macroeconomic conditions, including fiscal policies, labour and product markets, competition, regulatory environment, and planning, form the foundation for business growth. Stable policies and a positive economic outlook encourage investment, while excessive regulation burdens SMEs.

Investment in tangible and intangible capital plays a critical role. Uncertainty hampers business investment, making long-term policies essential for stability. A balanced approach is needed to ensure all aspects of the productivity cycle, from demand to income, are addressed.

Future focus

Government policy undoubtedly influences business productivity in the UK. While some policies support growth, others present challenges. While there is a consensus on the importance of stability, clarity, and consistency in policies, the current fragmented and short-term nature of many policies often falls short.

The Productivity Institute’s Productivity Agenda highlights the need for a statutory growth and productivity institution to better coordinate policies, understand trade-offs, and prioritise actions. Such an institution could play a pivotal role in aligning diverse policy measures and strategies across different sectors and regions, helping to provide a clearer and more coherent policy framework that promotes business confidence.

A well-coordinated and strategic approach to policymaking can significantly contribute to fostering economic growth. Investing in institutional structures that promote collaboration, coherence, and long-term planning will be crucial steps towards achieving sustainable business productivity.

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