David Prosser: Small businesses hold the key to raising Britain's productivity

Small Talk

Improving productivity is the next big challenge for the UK’s economic policymakers. It represents an opportunity to confront one of the most awkward questions facing the Government: why has it proved so difficult to boost real wage growth (and thus living standards) when the economy has been performing so strongly? The answer is that while we have record numbers of people in employment, their individual economic contributions are not increasing, so nor is their pay.

Given that a clear majority of people employed by businesses work for small and medium-sized enterprises (60 per cent according to the most recent government estimate) you might think that work on productivity would have focused on firms of this size. In fact not: there has been almost no research into the drivers of productivity at smaller businesses, even though there is every reason to think these drivers might be different to those that apply to the biggest companies.

Until now that is. A cross-party group of MPs will this week publish recommendations aimed at improving productivity among smaller businesses. The All Party Parliamentary Small Business Group’s report follows a 10-month investigation into productivity at small firms, which pinpointed specific challenges confronting such enterprises.

Brian Binley, the Conservative MP who chaired the inquiry, argues that until policymakers address these challenges head-on, it will be difficult to raise productivity across the whole economy. “Small businesses have been responsible for much of our recent economic growth,” Mr Binley says. “Addressing the barriers that hold them back and giving them the right support is crucial to closing the productivity gap.”

The initiative is supported by the Federation of Small Businesses, which has been monitoring productivity among smaller firms for the past five years. Its analysis suggests that productivity growth, year-on-year, was negative for almost all of that period, only turning positive during the second half of last year. As a result, productivity in small businesses today, as measured by inflation-adjusted turnover per employee, is 3 per cent lower than it was at the beginning of 2010.

Mike Cherry, national policy chairman of the FSB, says this isn’t a party political issue but a failing generally of policymakers to target smaller firms in their efforts to improve productivity. “The next government has an important role to play in addressing this long-standing weakness, regardless of which party or parties form the administration,” he says.

The MPs say initiatives are required in at least seven areas (many of which have been long-term hobby horses of Small Talk). They range from better incentives for small business investment – through consistent policy on reliefs such as the Annual Investment Allowance, for example – to universal access to high-quality broadband. Skills and training programmes are particularly important, the MPs say, while public procurement policy has a role to play too. The MPs are also critical of the extent to which local enterprise partnerships have been able to drive investment in regional growth.

Some of these ideas would require a new commitment of public money, while others simply mean refocusing existing policy priorities or targeting work already being done in new ways. The FSB thinks the best way to channel these efforts would be through the launch of a “UK Small Business Administration”, which could bring together separate work streams.

Such an agency would be modelled on the US Small Business Association, whose chief executive holds a cabinet post in President Obama’s administration – giving it a far greater profile and influence than any equivalent body in this county enjoys. You can see why that’s necessary – large companies, by virtue of their individual scale, get far greater access to government than their collective contribution to the economy merits, and are able to influence policy accordingly. Smaller firms rarely have the ear of those in power.

Exporters must tackle broader range of markets

Britain’s small and medium-sized enterprises hope to increase exports by 5 per cent during 2015, according to a report from Grant Thornton and the Institute of Chartered Accountants in England and Wales – ahead of the national average of 4.3 per cent. But such firms will need more support to achieve that goal, the report added.

The ICAEW said higher exports were crucial as Britain seeks to rebalance its economy, but that exporters must also target a broader range of markets, including China, India and Russia.

“For many new or prospective exporters, the cost of researching and exploring overseas markets is burdensome,” said Clive Lewis, the ICAEW’s head of enterprise. “SMEs may not recoup the benefits of such investments in the short term and will therefore be deterred from trading internationally. We want to see an export incentive from government in the future.”

Meanwile, the ICAEW is publishing a free guide to exporting (details online).

Fines rise under pension rules as deadline passes

All businesses with 54 or more employees should now have set up a pension scheme for employees, with the latest “staging date” for smaller organisations passed yesterday under the auto-enrolment system. By the end of the year, auto-enrolment, being phased in over a five-year period starting with larger companies, will cover all employers with 30 or more members of staff.

Official data suggests auto-enrolment has been broadly successful, at least in terms of raising the number of people saving for retirement, with pension participation at a 17-year high. However, the number of employers falling foul of the rules, which include fines for businesses that fail to get arrangements set up in time, is increasing as more smaller employers come under the regime.

“The process of automatically enrolling people into pensions isn’t complete,” said Chris Noon, a partner at the consultancy Hymans Robertson. “There are still many SMEs that haven’t been through this yet.”

Small business person of the week: Fighting prostate cancer without running marathons

Matt Sadler; Founder, Two Fingers Brewing

“I set up Two Fingers two years ago with six friends and colleagues. We had a simple mission: to fight prostate cancer one beer at a time. Between us, we knew several men who had been affected by prostate cancer and we were aware of how little attention the disease gets: it kills as many men as breast cancer kills women.

“We wanted to do something, but none of us felt like running a marathon.

“The marketing agency we worked for was moving office to a building with a bar, and we got talking about how great it would be to produce our own craft beer for the bar. Then we realised we might have hit on a good idea. What if we set up a business selling beer and donating the profits to Prostate Cancer UK, the leading charity in this field?

“To begin with, we produced 1,000 bottles of beer and sold them to friends and family. Their response was brilliant and we realised we had a potential business on our hands.

“We spent almost a year investigating the possibilities, talking to brewers and getting to grips with the industry; then we began pitching our product.

“Tesco was the first to stock our beer, which was great. We’ve also got deals with Ocado and Morrison’s, Jamie Oliver’s chain of restaurants, and Club Gascon, the Michelin-starred restaurant in London. We’re a social enterprise rather than a business: all profits still go to Prostate Cancer UK.

“The brilliant thing about the model is the support you get from partners who share your passion for the cause. We’ve got a fantastic craft brewer in Hepworth, distribution from Marston’s and a range of other partners who all supply their services at cost, or even below.

“Sales have really taken off this year and we’ve begun picking up awards too. All the founders still have day jobs but the dream is to go to work for the business on a full-time basis.”

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