• Companies founded since the recession caused UK productivity to fall by 2%
• Government should better target the support it provides small and new businesses, Nesta says
• Productivity growth stagnant across most sectors of UK economy

New research commissioned by UK innovation foundation Nesta has found that the low productivity of new firms had a negative impact on total UK productivity, causing a 2% reduction in national productivity between 2010 and 2013.

The research is the latest collaboration between Nesta and the National Institute of Economic & Social Research (NIESR) examining the subject of UK productivity, and is based on a detailed analysis of comprehensive firm-level data provided by the Office for National Statistics.

Labour productivity (the amount of output produced per person per hour worked) is one of the main drivers of living standards and economic growth. In 2014 British workers produced 18% less per hour on average than those in other G7 countries including Germany, France and the United States. Previous research published by Nesta has suggested that low productivity costs the UK economy just under £80 billion in lost GDP each year.

Although it is normal for newly established businesses to start out being relatively unproductive and improve over time, the performance on average of the 2010-2013 cohort has been significantly worse than that of their predecessors.

The research also found that the slow growth and stagnation in productivity experienced since the 2008 financial crisis - and the so-called productivity puzzle - is common across many different sectors of the UK economy. This suggests that market-wide factors, rather than industry-specific inefficiencies, may be responsible for the issue.

Stian Westlake, Nesta’s executive director of policy and research said: “The slump in UK productivity since the recession has stumped policymakers and business leaders for some time. As this new research shows, it’s a puzzle that only seems to increase in complexity.

“What’s clear is that recovery has been slow coming. Productivity only reached pre-recession levels late in 2014, and across many industries has virtually plateaued. Part of the reason looks to be that unproductive new companies are actually dragging down overall productivity.

“It’s important to emphasise that these findings don’t mean that we should not support new businesses - which are essential to a thriving economy - but they are a reminder that quality matters more than quantity. What’s important now is that the government starts supporting the most productive new businesses in more targeted and dynamic ways.”

Nesta’s recommendations for how policymakers can create an environment in which productive new firms are able to thrive:

-       An end to blanket business support spending, like the Small Business Rates Relief - a £7 billion tax cut announced in March’s budget for all small firms and SMEs - which could well exacerbate the situation by keeping low-productivity firms in the market.

-       More to be done to measure the effectiveness of business support spending - around £10 billion was committed last year, with little evidence of its impact.

-       A series of government-led reviews of business regulation environments within a range of industries, examining how best to cut the red tape preventing innovative businesses from thriving and driving up productivity.

*ENDS*

Notes to editors

For further information please contact:

Matthew Hull, Press Officer I +44 (0)20 7438 2543 I [email protected]

About Nesta

Nesta is the UK's innovation foundation. We help people and organisations bring great ideas to life. We do this by providing investments and grants and mobilising research, networks and skills. We are an independent charity and our work is enabled by an endowment from the National Lottery. Nesta's work on productivity has focused on. Nesta is a registered charity in England and Wales 1144091 and Scotland SC042833.

www.nesta.org.uk | @nesta_uk

About NIESR

NIESR aims to promote, through quantitative and qualitative research, a deeper understanding of the interaction of economic and social forces that affect people's lives, and the ways in which policies can improve them.

www.niesr.ac.uk I [email protected]

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