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Innovation Diffusion: The solution to the Productivity puzzle


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Presentation to ERC State of Small Business Britain Conference 2017 by Tom Thackray.

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Innovation Diffusion: The solution to the Productivity puzzle

  2. 2. 2 FOUR MAIN DRIVERS OF REGIONAL PRODUCTIVITY 1/ Educational attainment of young people at 16 and skills - A strong school performance and ensuring children get the best result at GCSE (or equivalent) is the single most important driver of productivity differences - There is also a crucial role for businesses to help get things like ‘in-work’ training and development right 2/ Transport links that widen access to labour - A greater pool of skills and talent leads to greater connections between business and supply chains and higher productivity in the local area. - Improved connections between the UK’s largest cities can help to drive growth - Further gains can be made by improving local transport links and reducing congestion 3/ Better management practices - There is great potential for firms to increase their productivity by closely examining their management practices and adapting. 4/ A higher proportion of firms who export and innovate - Firms with higher productivity are more likely to export, but exporting also makes firms more productive
  3. 3. 3 Distribution of businesses relative to the expected productivity1 for a firm of their size in their sub-sector 2013, percentage of firms THE UK’S PRODUCTIVITY CHALLENGE IS DRIVEN BY A HIGHER PROPORTION OF LOWER PRODUCTIVITY FIRMS RELATIVE TO PEERS 6 2 10 4 180 9 8 7 5 3 1 0 200160140120100806020 400-20-200 -180 -60-220 -100-120-140 -40-160 -80 FranceUK Germany Expected value Productivity1, difference from expected value as a proportion of peer group median The UK has a far greater share of relatively low productivity businesses than France and Germany The UK also has more highly productive businesses than France and Germany
  4. 4. 4 THESE PRODUCTIVITY DIFFERENCES ARE SIGNIFICANTLY HIGHER IN THE UK THAN IN ALL OTHER COUNTRIES ANALYSED BY THE OECD 2 5 4 3 0 1 JapanDenmark Norway FranceFinlandItaly New Zealand UK 3.0 14 02 06 13 1.5 11 0.5 08 05 09 12 15 1.0 07 03 10 2.0 0 042.5 Productivity dispersion1 between top and bottom decile firms across different sectors2, 2002-15, percentage difference approximated by log differences ManufacturingServices Delta between top and bottom consistently above peers Delta was in line with peers pre- crisis, but grew thereafter SOURCE: Productivity Puzzles (Chart 20) – Haldane (2017), Haldane source: OECD: Berlingieri, Blanchenay and Criscuolo (2017, forthcoming); ONS research database and Bank calculations
  5. 5. 5 ▪ OECD claims “…a conjecture (consistent with the evidence to date..) is that the productivity divergence across firms has resulted in an increase in labour income inequality” 0 0.5 0.5 0.9 0.2 0.2 0.4 0.4 0.3 0.7 0.6 0.8 0.1 P90/P50 ratio in the firm distribution of labour productivity ITA TUR JPN ESP HUN PRT GBR IRL LUX AUT BEL OECD KOR DEU SWE POL SVN FRA NLD FIN DNK P90/P50 ratio in the firm distribution of average labour income GRC THE UK’S HIGHER PRODUCTIVITY DISPERSION IS ALSO CORRELATED WITH HIGHER LEVELS OF INCOME INEQUALITY
  6. 6. 6 UK BUSINESSES’ ‘FAILURE TO ADOPT’ IS A KEY FACTOR IN PRODUCTIVITY DISPERSION “Speeding up rates of technological diffusion to low-productivity companies could make significant inroads into the productivity puzzle” Andy Haldane, Bank of England “New technologies are spreading at an increasingly fast pace from country to country but at an increasingly slow pace to all firms” OECD “Innovation is responsible for 50%-70% of productivity growth, with innovation diffusion making up a significant part of this” McKinsey Global Institute and Nesta
  7. 7. 7 ▪ UK adoption levels of readily available digital technologies are considerably below European maximum levels e.g., mobile broadband connections, CRM systems, cloud computing, ERP systems 81 65 54 30 24 17 7 6 Social network Website Broad- band CRM RFIDSupply chain mgt 20 Cloud Computing ERPE-salesE- purchases 51 European max Ireland Sweden Denmark Estonia Spain SOURCE: OECD, 2015 Penetration rates of digital technologies within select European economies 2015, Percentage of enterprises with ten or more persons employed THE PENETRATION OF DIGITAL TECHNOLOGIES AMONG UK FIRMS IS MODERATE VERSUS COMPARATOR COUNTRIES UK
  8. 8. 8 FIRMS IN THE UK HAVE LOW LEVELS OF INNOVATION ADOPTION RELATIVE TO EU PEERS 0 10 20 30 40 50 Product Process Marketing Organisation EU 28 Germany France UK Switzerland TOP (EU) MIN (EU) LuxembourgSwitzerland Switzerland Belgium Percentage of firms saying they had engaged in innovation, by type SOURCE: CIS Survey Eurostat, 2014
  9. 9. 9 AND UNDER-INVESTMENT NOW COULD REDUCE CUTTING EDGE ADOPTION IN THE FUTURE Percentage of companies who said they invested in a technology in the past twelve months (by self-categorised group) Percentage of companies who said it was in their business strategy to invest in the next 5 years (by self-categorised group) SOURCE: CBI Survey – Adopting the future