Weak investment, innovation and management hamper UK productivity

A study by researchers at the London School of Economics and Resolution Foundation think tank says low business investment was the clearest difference between Britain and higher-productivity nations.

Business capital investment in Britain was 10% of gross domestic product in 2019, compared with 13% on average in the United States, Germany and France. (but isn’t it what one does with capex that matters most – the efficiency and effectiveness of its use, not the initial costs?)

British business investment in research and development also lagged behind levels in other countries. (same question as for capex?)

Last month Prime Minister Boris Johnson highlighted Britain’s productivity problem (though few economists agreed with his diagnosis) that immigration of low-paid workers from the European Union bore much of the blame – that a ‘high-wage, high-skill, high-productivity’ economy comes from restricting immigration so that truck drivers, care-workers and other shortage occupations are paid more, levelling up the country – and that levelling up poorly performing companies or poorer regions will raise productivity significantly for the UK as a whole

The study claims that ‘output per hour worked’ in Britain is around 15% below that in the United States, Germany and France – though above that in Japan (which should cause pause for doubt about the validity of the base stats), Italy and Canada – and has barely grown since the financial crisis.

Bank of England policymaker Jonathan Haskel, speaking on a panel to discuss the report, said Brexit played a big role in depressing business investment since the 2016 referendum and would continue to do so:

  • “You might for political reasons support Brexit. That is perfectly okay. But from an economic point of view, all the uncertainty that led up to that, the series of cliff edges around the negotiation of the withdrawal agreement, were really bad for investment”
  • “A lack of access to finance – particularly for firms that rely heavily on ‘intangible’ investment such as in-house software development – was probably a bigger barrier”

A global survey of management practices suggested high-quality (how defined?) management was more common in the United States and Germany than in Britain, although not in France

But other commonly cited factors – such as Britain’s smaller manufacturing sector, big gaps between the most and least productive companies, or workers being stuck in ‘zombie’ firms – did not explain Britain’s underperformance. (not even partially?)

“Rather than focus on the UK’s long-tail of unproductive firms, we need to see economy-wide improvements to how firm invest and innovate, as well as how staff are managed and trained,” said Greg Thwaites, research director at the Resolution Foundation – (i.e we need to improve on all fronts?).

But then he adds: “It would be better if more work was done by stronger, more-efficient companies. This would involve quite a reallocation of work and the closure of many firms”.

(Sadly, that seems to be a non-starter conclusion for such an important study from such eminent economists)

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