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Mind the productivity gap that limits business and wage growth

Innovation is vital to unlocking the ‘productivity puzzle’, writes Adrian Dawson.

The economy is recovering, employment is growing and the great recession seems to be fading into the collective memory. Recent surveys show businesses across all sectors are feeling confident about the future.

However, this good news masks a worrying and potentially deep-rooted challenge to our longer term competitiveness and for wage and employment prospects: our lagging productivity.

To put things simply, the amount we produce from what we put in compares poorly with our competitors nationally and internationally.

While past recessions have been typified by immediate drops in productivity as demand reduces and the economy contracts, they have also seen productivity bounce back relatively quickly. The worrying trend in the current cycle is that productivity levels show little signs of recovery. The ‘productivity puzzle’ has exercised the minds of economists for some months.

So why does productivity matter? It’s about making the best and most efficient use of our resources, whether that be people, buildings, manufacturing equipment or raw materials. That makes us more competitive and, economists tell us, productivity increases should be matched by wage increases, meaning productivity growth helps boost incomes. So businesses do better, wages increase and tax revenues also rise.

Unfortunately for the South West the productivity challenge is not new – it has been a focus of economic strategy for many years. The current national debate however, should provide a sharper focus on the issue. Indeed, in the recently published Manufacturing Barometer produced by the Manufacturing Advisory Service, over 80% of South West respondents said they want to improve productivity in the next six months.

It is likely that there is a complex set of factors at play that have contributed to the current productivity puzzle. The evidence points to businesses being more cautious about investment in fixed capital or innovative capacity after the recession. There is a direct correlation between innovation – businesses developing or introducing new products or services to access new markets or increased efficiency – and productivity.

If we accept that we may face an even greater productivity challenge than elsewhere in the UK then if we support those factors that increase productivity the South West could be among those benefiting most.

With our high proportion of small and medium sized enterprises (SMEs), we have a business community which has been more difficult for universities to engage with than, say, multi-national corporates. However, I believe the real sparks of innovation lie in SMEs, providing huge potential for the South West to pioneer new ideas and ways of working.

We also have great universities with a unique range of skills and facilities. Universities have extraordinary potential to support small businesses and can provide access to finance, facilities, knowledge, skilled people and a culture that fosters innovation.

So businesses need to tap into the resources on their doorstep but universities need to be open and business focused – and most importantly responsive to business need, acting as brokers to access the networks of partners that universities have, and which are normally closed to smaller enterprises. GAIN – the Growth Acceleration and Investment Network – was established to do this, recognising that the range of support a business needs is found across a range of partners, both private and public sector.

Many businesses, particularly in the far South West, struggle to find the investment required to innovate. Universities have been able to help businesses access finance, in a small scale through Innovation Voucher schemes, and in a larger scale through delivering larger Regional Growth Fund programmes.

Geography is also an issue, with many more isolated businesses missing out on the benefits that city firms can gain from interacting with others, often yielding new ideas and collaborations. The web is helping to bring businesses together, but there is still a long way to go.

Perhaps the greatest challenge we face is how to stimulate a culture of innovation in the first place. How do we train our leaders and managers (and those of the future) to create an organisational culture that fosters innovation? While the focus of much investment has been on industries that are seen as locally important, there is an argument that some of this investment might be more effectively channelled to the cultural change required to underpin innovation wherever it occurs.

Because of one thing we can be certain, the real transformational innovation is likely to come from where we least expect it, and often from the creativity that results in sectors or industries working together.

Adrian Dawson is head of GAIN at Plymouth University

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