Weak investment, innovation and management hamper UK productivity

London, November 15 (BUS) – Low business investment, weak management and a lack of commercial patents are the main factors behind a massive productivity shortage in Britain, according to new research published on Monday.

Reuters reports that solving Britain’s so-called productivity puzzle has been an unresolved challenge for economists and policy makers for years.

Britain’s level of productivity, measured in terms of output per hour worked, is about 15% lower than that of the US, Germany and France – although higher in Japan, Italy and Canada – and has barely grown since the financial crisis.

Last month, Prime Minister Boris Johnson highlighted the problem – as did his predecessors – although few economists agreed with his diagnosis that previous immigration of low-wage workers from the European Union bore much of the blame.

Low business investment was the clearest difference between Britain and high-productivity countries, the study, conducted by researchers at the London School of Economics and Resolutions Research, said on Monday.

Business capital investment in Britain reached 10% of GDP in 2019, compared to an average of 13% in the United States, Germany and France.

British commercial investment in research and development was 1.2% of GDP, compared to an average of 2% elsewhere, and the patent filing rate was half that of other countries, despite strong scientific research.

A global survey of management practices also indicated that high-quality management was more common in the United States and Germany, though not in France.

However, other commonly cited factors – such as Britain’s smaller manufacturing sector, large gaps between the most and least productive firms, or workers stuck in “zombie” firms – did not explain Britain’s poor performance.

“The UK entered the 2000s with a poor productivity record, and a misdiagnosis of why this is happening. Rather than focusing on the long tail of unproductive UK firms, we need to see improvements across the economy for how companies invest and innovate, such as along with how they manage staff and training,” said Greg Thwaites, Director of Research at The Resolution Foundation.

Almost all economists see faster productivity growth as the key to long-term improvements in living standards.

But in the short term, increasing British business investment to US, German or French levels would pressure household consumption or require Britain to increase its already high external borrowing, the researchers said.

Such an increase in business investment financed from domestic resources alone would generate an additional 8 percentage points in GDP growth over 20 years, but it could take up to 15 years before household consumption recovers from the initial decline.

“The balance between investment, consumption and net imports, the consumption of which takes a hit, are two tough tradeoffs that policy will need to address,” the research said.

MI