Plant laptop
Britain's productivity is falling behind other economies because it is slower to turn ambitious smaller firms into exporters of innovative new products and services, according to a new report.

With more support, it is estimated that up to 110,000 small to medium-sized enterprises (SMEs) could become regular exporters, adding an extra £1.15 billion in Gross Value Added (GVA) to the economy in the first year alone, in the form of new and higher value jobs.

The report published today (Monday), Unlocking UK Productivity has been co-authored by Goldman Sachs, the Enterprise Research Centre (ERC) and the British Business Bank (BBB). Its findings draw heavily on the core research themes of ERC for the past three years.

Up to 2008, UK productivity - the amount of economic ouput each worker creates per hour - was on a strongly upward trend. But since then, it has flatlined and the UK has fallen behind many of its international counterparts.

The 'productivity gap' with other G7 economies is now around 6%. It is estimated that UK's productivity is around 16% lower than it would have been if it had stayed on its pre-2008 trajectory.

The issue has confounded economists and led to the government publishing at 15-point plan in July this year to tackle the problem.

But the new report highlights ERC and wider research showing a crucial but under-explored factor affecting productivity - the ambition of entrepreneurs to grow. Firms led by 'growth inclined' owners are most positive towards exporting and open to innovation - the two factors which drive productivity in UK businesses.

While the UK has seen the highest number of start-ups of OECD countries, more than half hold within three years, growing enough firms with ambitions to scale would have a significant impact on overall productivity. But just 18% of UK SMEs express high ambitions to grow, compared to 27% in the US. Data from the Global Entrepreneurship Monitor (GEM) shows that early-stage entrepreneurs in the UK have the second lowest growth ambitions in the G7 economies.

One outcome of low growth ambition is that too few SMEs are bringing new products and services to market. Just 28% of British firms innovate, placing the UK 24th of 34 European countries and making its innovation rate comparable with the likes of Turkey and Serbia - way behind leading nations like Germany, Belgium and Iceland.

In addition, British SMEs are exporting less than other countries. While the government wants 25% of UK firms to be exporting, since 2008 this figure has been declining and how stands at just 18%. And of these, only 17% are 'persistent exporters' that regularly sell abroad.

Innovation and exporting are strongly linked to highly productive firms, the research showed. SMEs that produce new good and services are around 7% more likely to export than non-innovators and exporters grow more than twice as fast as those that do not.

The report calls for greater support and education for entrepreneurs, citing the success of programmes such as Golman Sachs' own 10,000 Small Businesses programme in creating an environment where business owners can learn from mentors and peers over a significant time period.

Professor Mark Hart, ERC deputy director and programme director for 10,000 Small Businesses UK, said: "Although economic growth has returned, UK productivity since 2008 has been almost flat. This means we're producing less per worker than our international competitors and taking longer to create the same amount of economic value.

"Our research shows that there is huge untapped potential out there and that if we could build the confidence of innovative businesses that have high growth ambitions to start exporting regularly, we could generate an enormous boost to our economy.

"The challenge for those providing this support - whether government or the private sector - is to make sure it lands in the right places. A scattergun approach won't work, because only a relatively small proportion of firms combine a high-growth mindset with innovation and a capability to export."

Michael Sherwood and Richard Gnodde, co-CEOs of Goldman Sachs International, said: "We are very pleased to continue our commitment to supporting high-growth small businesses in the UK through our '10,000 Small Business' programme. We believe the private sector can make important contributions to supporting small business growth, creating jobs and boosting economic growth."

Ron Emerson, chairman of the British Business Bank, said: "As a champion for smaller businesses in the UK, we are well aware of the importance of high growth SMEs to the nation's economy. We are therefore delighted to have contributed to this report and welcome the expansion of Goldman Sachs' 10,000 Small Business programme."