Small businesses and productivity Contents

1Introduction - Small Businesses and Productivity

The Importance of SME productivity

1.The productivity of small businesses is important because of the key role they play in the UK economy. Small businesses account for 99.3% of all private sector businesses and small and medium-sized enterprises (SMEs) 99.9%. Small and medium businesses employ 16.3 million people (60% of all private sector employment) and have a combined turnover in the region of £2 trillion (52% of all private sector turnover).1 SMEs have also been a dynamic part of the UK economy in terms of their growth. Since 2000, the number of SMEs has increased by 2.2 million, an increase of 64%. By contrast the number of large businesses grew by only 4%.2

Defining Productivity and Small Businesses

Productivity in its simplest terms is the total output produced per input within an economy.3

A small and medium-sized enterprise is defined as a company that employs under 250 employees. A small business is a company that has fewer than 50 employees and a micro business employs fewer than 10 people.4

UK Productivity and its ‘Long Tail’

2.UK productivity has been weaker than many of its G7 and OECD competitors and has worsened since the 2007–2008 downturn caused by the financial crisis.5 For some time, it has been accepted that part of this is due to the UK having a ‘long tail’ of low-productivity firms, longer than many of our competitors and largely composed of small businesses.6 The Government has accepted that this is a key issue that needs addressing and launched a productivity review in May 2018 to address this.7

The BEIS Committee’s Inquiry into Small Businesses and Productivity

3.We decided to launch an inquiry into small businesses and productivity to examine some of the key problems that have been cited as causing low productivity and the potential solutions that might address them. This included: the availability of business support and advice, levels of management and digital skills and how they can be improved; support for small companies that want to scale-up and those that do not; payment practices that adversely affect small businesses; and, government procurement from small businesses.8 It follows on from our previous inquiries on the Government’s Industrial Strategy,9 which included a focus on small businesses and scale-ups and their role in improving UK productivity, and on Carillion,10 which highlighted the issue of late payments, and corporate governance with its wider consideration of the culture and behaviour of big businesses.11 Our inquiry was launched on the 31 January. We received 31 pieces of written evidence and held 4 evidence sessions between April and October 2018.12 The latter included sessions with the Small Business Commissioner Paul Uppal, academics, institutes, think tanks, small business owners from a range of sectors, the BEIS Director for Business Growth, and the Minister for Small Business, Consumers and Corporate Responsibility, Kelly Tolhurst MP. We also held one private evidence session with several small business owners on the issue of late payments. We are grateful to all those who contributed to our inquiry.

Treasury Select Committee Inquiry on SME Finance

4.We did not explore SME finance, as this was considered separately by the Treasury Select Committee which published its report on the 26 October 2018.13 It recommended that the British Business Bank and the Small Business Commissioner should play a key role in assisting SMEs by building awareness and understanding of the financing options available and that the Treasury should seek to identify why SMEs appeared unwilling to apply for finance, and how SMEs could benefit from long-term capital.14 The Treasury Committee pointed to the current inability of challenger banks to inject more competition and called for the Competition and Markets Authority to provide an update on progress. It also made several recommendations to help SMEs resolve disputes with lenders and for more progress to be made on open banking.15 We endorse the Treasury Select Committee’s recommendations, which complement the findings of our inquiry.

2 As above, p 7. See also: Federation of Small Businesses, UK Small Business Statistics, (accessed 1 November 2018).

3 BEIS, Business Productivity Review, (May 2018), p 9. See also: OECD, Defining and Measuring Productivity, (accessed 1 November 2017); OECD, OECD Compendium of Productivity Indicators 2018, (2018), pp 9–10; House of Commons Library, Productivity in the UK, (November 2017), p 4–5. See also: Michael Mankins, Great Companies Obsess over Productivity Not Efficiency, Harvard Business Review, (March 2017).

4 House of Commons Library, Business Statistics, (28 December 2017), p 5.

5 See for example: Office for National Statistics, International comparisons of UK productivity (ICP), final estimates: 2016, (April 2018).

6 See for example: Gavin Jackson, Inside the project to fix Britain’s low-performing businesses, (August 2017); Andrew Haldane, Productivity Puzzles, Bank of England (March 2017).

7 BEIS, Business Productivity Review, (May 2018). The consultation closed on 6 July 2018 and the Government is currently considering the responses.

8 The Inquiry webpage can be found on the BEIS Committee website.

9 BEIS Select Committee, Industrial Strategy: First Review, (HC 616; March 2017).

10 BEIS Select Committee and Work and Pensions Select Committee, Carillion, (HC 769; May 2018).

11 BEIS Select Committee, Corporate Governance, (HC 702; April 2017).

12 Written and oral evidence can be accessed on the BEIS Committee website.

13 Treasury Select Committee, SME Finance, (HC 805; 26 October 2018). See also Close Brothers, The Power of Productivity Measuring, understanding and improving productivity for SMEs, (January 2018), Chapter 5, which discusses UK SME’s access to finance.

14 As above.

15 As above, pp 51–54. The Federation of Small Businesses published a Report in November 2018, which also called for more support on alternative finance options and on open banking. Federation of Small Businesses, Lack of growth finance holding back UK economy as Brexit draws near, say small firms, (November 2018).

Published: 5 December 2018