New report uncovers ‘post code lottery’ of small business productivity

Sage and Nesta report shows small and medium businesses in some local authorities are up to 26 times more productive than others – with local initiatives, business death rates and education all playing a part.

Sage and Nesta have published a data-rich report highlighting a concerning productivity gap, with the most productive part of the UK (City of London) a huge 26 times more productive than the least (West Somerset).

For the first time, the report, produced in conjunction with Nesta, the innovation foundation, looks at a huge range of sources to analyse the UK small and medium business landscape at local authority level.

The report, ‘The State of Small Business: Putting UK entrepreneurs on the map’ reveals SME growth and productivity for every local authority in the UK and highlights the need for a better data driven understanding of how local government can support entrepreneurs.

It has been designed to inform policy makers from Whitehall to Town Hall, on how best they can make informed and evidence led policy decisions to support their local entrepreneurs. Together, the digital map and report demonstrate the varied landscape and dynamic characteristics of enterprise at local level. Findings include:

A nation divided remains

Regionally, London has witnessed some of the highest growth in numbers of small businesses in the UK a 41 per cent increase, and ten times greater than Northern Ireland. London and the South East are, in fact, home to more than one-third of all small and medium businesses in the UK. Even accounting for population, these regions still have a significantly higher ‘SME’ density than other regions.

Productivity (defined in the report as turnover per employee) continues to show enormous variation across the UK, driven by local disparities and determined by issues such as skills availability and connectivity. The variance in productivity within regions is often greater than the variation between regions.

Related: How to create a more productive working environment as a small business

On average the most productive local authority is at least four times more productive than the least in each region across the UK. The huge disparity of 26 times difference means that in the most productive local authority in the UK – City of London – each worker at a Small & Medium Business is worth £1.45 million in company turnover. In the least productive local authority – West Somerset – that figure is just £56,500.

Despite a significant divide, there are hotspots of productivity, such as Mid-Ulster, Newport and Barnsley, to be found across the UK.

With creative destruction comes productivity

The data illustrates that areas with high business survival rates tend to have low productivity, and vice versa. For instance, Watford has one of the lowest average five-year survival rates but one of the highest measures of productivity. This underscores the idea that, whilst failure of individual businesses may be painful, the dynamism of ‘creative destruction’ is good for the economy.

Small businesses punch above their weight in job creation

Since 2010, small and medium businesses have created 73 per cent of new private sector jobs across the UK, despite accounting for just 60 per cent of private sector employment. Of these 2.8million jobs, 40 per cent can be attributed to small and medium enterprise employers. Up to 34 per cent came from non-employers.

Tech sector drives top growth

Whilst the UK as a whole has seen a sizeable 23 per cent growth since 2010 in the number of small and medium businesses, technology continues to be the stand-out sector. The number of tech enterprises has grown 42 per cent, double the average growth rate across all sectors. Also thriving are SMEs in the education sector, which has more than doubled in size since 2010. In terms of growth in turnover, the education sector emerged on top with 65 per cent growth since 2010, in comparison to construction which experienced the slowest growth – only eight per cent.

Stephen Kelly, chief executive at Sage, says, ‘We’re proud to shine the spotlight on the buccaneering spirit of our entrepreneurs. Despite ongoing economic and political instability, they’ve shown significant resilience, with 29% more Small & Medium businesses trading since 2007.

‘However, as our report shows, productivity has been flat since 2010. Entrepreneurs have been forced to drive with the handbrake on for the past seven years and it’s up to government to help release it if our entrepreneurs are going to fulfil their full potential for the economy. We know that growth and productivity isn’t a common theme nationally, and even more strikingly, regionally. The huge variation at a local authority level – revealed in this report for the first time – is a real wake up call. We can no longer afford to sleepwalk through the productivity problem by following a ‘one size fits all’ approach.

‘Our call is for government to work with local authorities, mayors and MPs to deal with this current productivity log jam locally. This can be achieved by driving up standards in education and providing appropriate digital skills training and digital tools for our entrepreneurs. Secondly, we give Small & Medium businesses access to easy to use productivity metrics and benchmarks. Finally, we recommend ensuring local authorities have the means and strategies in place to support, fund and educate small and medium businesses in a targeted fashion.’

Christopher Haley, head of new technology and startup research at ‎Nesta, says, ‘Entrepreneurs are often agents of innovation. They are core to the process of creative destruction and crucial for increasing employment. Understanding the conditions needed for new businesses to start and scale is therefore of great importance to us all.

‘However, we also need to address the variance in productivity between established SMEs and between areas. Much of the answer is innovation: there is increasing evidence that innovation is essential for productivity growth and that this, in turn, is essential for rising living standards.

‘Whilst national government obviously has an important role in encouraging business, there is also much that can and should be done at a local level to create the best possible environment for entrepreneurs. Part of this means recognising local differences and improving data availability.’

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