Weak investment, innovation and management hamper UK productivity

By David Milliken

LONDON (Reuters) -Low business investment, weak management and too few commercial patents are the main factors behind Britain’s weak productivity record that has been a puzzle for policymakers for years, according to new research published on Monday.

The study, by researchers at the London School of Economics and the Resolution Foundation think tank, said 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.

British business investment in research and development also lagged behind levels in other countries.

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.

Output per hour worked in Britain is around 15% below that in the United States, Germany and France – though above that in Japan, 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,” he said.

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, he said.

A global survey of management practices suggested high-quality 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.

“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.

Faster productivity growth is widely seen as key to long-run improvements in living standards.

But in the short run, raising Britain’s business investment to U.S., German or French levels would squeeze household consumption or require Britain to attract more foreign investment, the researchers said.

An increase in business investment funded by domestic resources alone would generate an extra 8 percentage points in GDP growth over 20 years, but it could take 15 years before household consumption recovered from an initial fall.

Assuming an economy running at full capacity, with output essentially fixed in the short term, devoting resources to business investment means fewer resources available to produce goods and services consumed by households in the short run.

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

(Reporting by David Milliken, editing by Andy Bruce and William Schomberg)