The UK economy has a productivity problem. Entrepreneurs can fix it. So far, so obvious. But, there is a problem, one of the drivers of entrepreneurism may be the cause of poor productivity. Michael Baxter, tries to make sense of the riddle.
I have been busy talking to some of the UK’s most successful entrepreneurs and those who support them. And, so far, I have not been able to find a single person who disagrees with the statement that the UK is more entrepreneurial than it used to be. Everyone seems to agree that this is a good thing.
It is hard to argue otherwise, of course the UK needs more dynamic companies, and more dynamic men and women, generating new ideas and new ways of doing things. In an age of accelerating technology, that is what the doctor has ordered.
And the UK needs this more than most countries, because the UK has lousy productivity – of the G7, only in Japan and Canada is output per head lower. In 2015, UK output per head was 15.9 percentage points lower than the G7 average. GDP per hour worked was10.5 per cent less than in Italy, 22.2 less than in the US, 22.7 per cent less than in France, and 26.7 per cent less than in Germany.
They call it the productivity puzzle. UK unemployment is at its lowest level since the mid-1970s – falling rapidly since the 2008 crisis. Yet growth in productivity since 2008 has been abysmal.
That is why the UK government is still borrowing at such massive levels – normally when unemployment is low, tax receipts are high, and the government has an opportunity to pay back some debt. But low productivity means low wages, means low taxes, means high government borrowing, and also means a lot of popular discontent, meaning Brexit and in the US, it means Trump.
Clearly a greater level of entrepreneurism can provide a fix – at the very least a partial fix, maybe even a total fix.
But this is where the riddle is revealed.
Ask experts in this field why entrepreneurial activity has increased and you get a lot of answers. But one common theme is low interest rates.
Neeta Patel, CEO of the New Entrepreneurs Foundation says that, thanks to record low interest rates, “people’s savings’ returns have not been that great, so investors have been looking at diversifying and putting money in slightly higher risks, high return investments such a VC funds, which of course, invest in start-ups.” She also links the rise of angel investors, at least partially, to low rates, as well as a number of other factors, such as SEIS and EIS.
Yet, if you look at the broader UK economy you find a problem.
As this chart, produced by the Bank of England shows, we have seen a rise in zombie firms. The bank defines zombie firms as companies which are more than ten years old, and the ratio of earnings, before interest and taxes, to interest expenses is below 1. Or in short, firms that are only surviving because interest rates are so low. And by this definition the share of zombie firms to the total has risen from around 5 per cent in 2007 to 10.5 per cent in 2016. See PRODUCTIVITY PUZZLE SOLVED: CENTRAL BANKS, AGAIN!
The narrative continues, it is zombie firms – that is to say companies that, under normal circumstances would have gone bust, that are propped up by low rates – that are the problem.
According to this argument, record low interest rates are a factor behind the rise of zombie firms, pushing down on productivity, but they are also a factor behind the rise of entrepreneurial activity, which will push up on productivity.
What can we say?
The UK desperately needs high productivity. As the baby boomers retire, the ratio of retired to working people will go through the roof, unless the working population can produce a lot more, it will not be possible to fund the retirement of the baby boomers.
And when rates are slow, investors tend to look towards more risky investments – which is what the UK needs. But others argue low rates has created a debt bubble and supported zombie firms, and only tears can result.
But maybe we just need to give this more entrepreneurial UK more time. It is a new phenomenon, and it does seem as if the entrepreneurial culture in the UK is gaining momentum. But it can take years before the seed of an idea creates something real. Forward wind the clock another five years, the success of entrepreneurial UK won’t only be celebrated in columns and on web sites such as this, it will be celebrated across the media. And by then, the bold, dynamic centres of enterprise will surely be growing faster than the number of zombie firms.
The UK is emerging an entrepreneurial success story – but more needs to be done, and one way to achieve this is to shine the media spotlight on entrepreneurs, their challenges, their failures and of course their successes.
The NatWestGreat British Entrepreneur Awards are currently open for applications, and entrants can apply here.